20 Aug 2020

This week, the seventh round of Brexit negotiations is taking place. While no significant breakthrough is expected, we understand at least some progress is being made on the governance of the agreement, while tensions remain over state aid rules and road transport. Ahead of this round, UK Chief Negotiator David Frost expressed his optimism that an agreement could still be found in September, while a spokesperson for the European Commission reiterated that a deal must be finalised by October to leave sufficient time for ratification. Moreover, Irish Prime Minister Micheál Martin also expressed his view that the EU and the UK would agree on a deal before the end of the transition period, emphasising what he sees as a shared understanding on the need for a comprehensive free trade agreement. Below we provide a summary of the latest developments members should be considering when assessing their Brexit contingency plans. As always, our other political updates can be found here. We also want to take the opportunity to remind members of our brexit@theia.org helpline which you can use for adhoc questions between now and the end of the transition period.

Update on equivalence:

European Commission Executive Vice-President in charge of financial services, Valdis Dombrovskis, reiterated this week the EU will not adopt equivalence decisions on certain areas of financial services in the short-term, underlining that UK-based investment firms may need to seek access on a country-by-country basis as per available national regimes. This echoes the European Commission’s 9 July preparedness Communication (here) which highlighted the European Commission had not even initiated its assessment process in a number of areas due to the fact that the EU legal framework is not yet in place, notably for investment firms where new rules will only be fully implemented in June 2021. We understand while the UK Treasury is continuing to work towards securing equivalence for UK investment firms under Article 47 (1) of MiFIR, this is now highly unlikely before the end of the transition period.

To assist members in navigating these national regimes, and with thanks to Simmons and Simmons, we attach a summary of the various measures available in key EEA markets.

ESMA letter on delegation:

Also this week, the European Securities and Markets Authority (ESMA) has published a letter (here) to the European Commission calling for restrictions to the delegation of portfolio management functions to non-EU firms post-Brexit. The letter proposes a number of changes to be made as part of the European Commission’s upcoming review of the Alternative Investment Fund Managers Directive (AIFMD), as well as part of any future review of the Undertakings for the Collective Investment in Transferable Securities Directive (UCITS), including the possibility of imposing new quantitative restrictions on delegation in addition to qualitative restrictions. In summaru, the proposals include:

  • A push to chill delegation by incorporating in Level 1 of UCITS/ AIFMD requirements consistent with ESMA’s 2017 opinion on supervisory convergence (here). This, of course, includes Para 62 “NCAs should require detailed information and evidence from .. authorised entities on why delegation to non-EU entities to a larger extent is objectively justified despite the fact that the geographical spread of investments serves as an argument against such delegation structure”
  • Introduction of new explicit quantitative restrictions on delegation, moving beyond qualitative restrictions as set out in the opinion. This includes “..legal clarifications on the maximum extent of delegation would be helpful to ensure supervisory convergence and ensure authorised AIFMs and UCITS [mancos] maintain sufficient substance in the EU” and “..complement the qualitative criteria set in Article 82(1)(d) [of Commission Delegated Regulation (EU) No 231/2013] with clear quantitative criteria or provide a list of core or critical functions that must always be performed internally and may not be delegated to third parties”
  • Closure of all perceived delegation loopholes – including temporary secondments from third country entities and “supporting tasks” undertaken by other entities. Notably it says there are “..questions whether those secondment arrangements are in line with the substance and delegation rules set out in the AIFMD and UCITS frameworks” and “In the absence of clear legal definitions or an exhaustive list of collective portfolio management functions … it is often difficult for NCAs to assess whether the ‘supporting tasks’ provided by the group entities are subject to the delegation rules set out in the AIFMD and UCITS Directive or not”
  • Introduce new level-playing field conditionality and supervisory controls of delegation. Today “AIFs and UCITS can be largely managed on a day-to-day basis by third parties (within or outside of the EU) that are not directly subject to the AIFMD or UCITS Directive. “To avoid regulatory arbitrage and protect EU investors, legislative amendments should ensure that the management of AIFs and UCITS is subject to the regulatory standards set out in the AIFMD and UCITS frameworks, irrespective of the regulatory license or location of the delegate.” “ESMA sees merit in implementing legislative clarifications in line with the interpretation supported by ESMA in Section VIII of its Q&As on the application of the AIFMD (ESMA34-32-352) 6 … to eliminate any residual legal uncertainties as to responsibilities of AIFMs for ensuring that the collective portfolio management functions set out in Annex I of the AIFMD are performed in compliance with the AIFMD rules.”

Given the importance of this issue to members, the IA is engaging closely with officials in both the UK and EU to ensure the global norm of delegation is protected. We are keen to hear directly from members your initial reactions to the ESMA letter by emailing brexit@theia.org. We will be preparing an updated position paper through the IA’s International and European Policy Committee, but have commented in the FT and other industry press as follows:

‘Delegation is an international norm that allows investors to access global expertise, investment opportunities, and economies of scale. The ability to delegate portfolio management is a key feature of the UCITS and AIFM Directives and we believe the current system for delegation already ensures proper and substantive oversight of activity and management of risk.’

Temporary Permissions Regime:

The FCA has updated its advice (here) on the operation of the Temporary Permissions Regime, confirming that the notification window for both inbound firms and funds will reopen on 30 September 2020. Firms and fund managers that have already submitted a notification can update this with the FCA if new products have been launched since the beginning of the second phase of Brexit negotiations in January. The FCA also confirmed that it will not be maintaining a public register of those funds which have notified to enter the TPR. Instead, we recommend that fund managers communicate directly with their platforms or other stakeholders confirming if and when a notification has been made.

Onshoring of EU acquis:

As you may know, over the course of the past 24 months the UK Government has been onshoring all EU acquis into the UK statute book so that when the UK finally leaves the EU, market participants should notice no difference in the rules and obligations that apply to them. During the onshoring process, the UK Government has simply sought to ‘copy and paste’ EU text into the UK, and remedy deficiencies in such legislation, such as reference to the UK as an EU Member State, which will no longer be valid after the end of the transition period. Members should familiarise themselves with the FCA’s approach to the onshoring process, and the limited areas where it will not be using its Temporary Transitional Powers to waive any regulatory obligations arising as a result of Brexit (here). To assist with navigating the various SI’s, we also attach a tracker of those that relate to our industry. We have also published a series of briefing papers on our members page (here). Here you can also find our previous documents on Brexit, including on marketing and distribution as third-country.