As the UK goes to the polls ESMA issues Brexit opinion: EU advised to play hard ball

08 Jun 2017

Private Equity and Real Estate Fund Managers with operations in the UK are faced with the prospect of having to change their current operating models to protect their businesses in the face of Brexit, whether hard or soft.

On the 31 May the European Securities and Markets Authority (ESMA) issued an opinion to EU regulators advising on a common approach being adopted by Members States regarding the UK's anticipated withdrawal from the European Union.

With negotiations due to begin on the 19 June the UK has until 30 March 2019 to agree a trade deal with the EU unless an extension is agreed, or failing this the UK will have to trade under World Trade Organisation rules.

In summary, ESMA has stated that that whilst the UK plays a significant role in the EU Single Market, it is important to ensure that there is a common focus at, "EU level to ensure a consistent supervisory approach to safeguard investor protection, the orderly functioning of financial markets, and financial stability.”[1] This is in light of ESMA stating that they expect to see what has been widely termed as a "Hard Brexit" where the UK will become a third country with UK based managers losing access to the single market by way of the marketing passport under AIFMD. The opinion does contain some ambiguity which potentially leaves the door open for a tailored arrangement, "without prejudice to any specific arrangements that may be reached between the UK and the EU."[2]

It is worth noting that the EU will not have everything its own way once the negotiation process is under way. The UK is, and it is anticipated will remain a key trading partner for various Member States who will want certain provisions included to ensure both parties have a continued positive trading arrangement.

Many asset managers potentially impacted by Brexit will be conducting their own analysis as to the implications of the UK leaving the Single Market and in particular, the impact this will have on their ongoing business operations. Previously, there were concerns from various pockets within the City of London that businesses would need to potentially relocate to an EU country.

In reality, we are currently seeing a variety of approaches being adopted but none of which include alternative investment fund managers moving their entire business out of the UK. Instead, some asset managers are relocating certain functions, such as the AIFM, from the UK to the EU and domiciling in jurisdictions such as Luxembourg and Dublin so they can continue to take advantage of the marketing passport indefinitely. At the other end of the spectrum, asset managers maintain the status quo on the expectation that the Brexit outcome will have little impact on their business operations or investment focus. However, following ESMA's recent announcement it is imperative for existing UK AIFM's to consider all potential outcomes, and prepare contingency plans in advance to ensure they will be able to react quickly and adapt to the post-BREXIT world irrespective of the outcome.

Either way, managers should monitor the discussions once they are under way to ensure they are appropriately informed and in a position where contingency plans can be implemented without delay, to minimise the impact on their ongoing business activities.  




[1], p.1.

[2] ibid., p.2.

Key contacts
Executive Director - Alternative Investments, Europe