After years of debate, the key remaining Brexit sticking point is known as the Irish backstop. The backstop plan is essentially an insurance policy of last resort to ensure an open border remains in place on the island of Ireland. Northern Ireland is part of the UK, while the Republic of Ireland is part of the EU. If the UK leaves the EU without a deal, thus leaving the customs union and EU single market, it could create a hard border.

The UK parliament is currently seeking “alternative arrangements” to avoid that. While other options remain viable, the prospect of a no-deal Brexit is becoming increasingly likely, meaning policymakers need to agree to an alternative Irish backstop as soon as possible.

UK Prime Minister Theresa May is due to report back to the UK House of Commons on 13 February 2019 on the latest negotiations, followed by another round of voting on 14 February on the way forward. As such, most regulators and asset managers have begun to make firmer practical preparations should no-deal be reached by 29 March 2019.

With 29 March coming sharply into view, and the probability of a no-deal Brexit seemingly increasing by the day, EU regulators have set about executing their no-deal contingency plans. 

Recently certain Memoranda of Understanding (MoU) were agreed between UK & EU regulators which mitigate the most adverse market consequences of a no-deal scenario. The MoUs serve to ensure that the EU and UK regulations will be deemed equivalent, retain information sharing and supervisory cooperation and thus retain reciprocal market access for regulated entities even in the case of a no-deal Brexit.

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The FCA also requested special legislative powers to implement the required regulations needed for a no-deal Brexit, without the need for government approval. These steps aim to curb some of the worst impacts of a no-deal Brexit scenario.

Ten Considerations for Asset Managers in a No-Deal Scenario 

There are certain steps and assessments which asset managers ought to consider in advance of a no-deal Brexit scenario in order to ensure they have considered all risks and impacts to the continuity of service to their clients. We lay out some of these here:

1.    For UCITS funds

  • Assess impacts to your UK domiciled UCITS funds
  • To ensure continuity of existing product distribution strategy into the UK after 29 March, consider applying to the FCA’s temporary permissions regime for UCITS or AIFMD funds sold into the UK
  • March 29Assess the impact of UCITS funds on delegation arrangements with UK providers  

2.    For funds in scope of AIFMD

  • Conduct impact assessment if you are a UK AIFM managing EU and/or non-EU AIFM funds
  • Assess the impact of AIFMD on delegation arrangements with UK providers
  • Assess AIFMD impacts once the UK becomes a third country for AIFMD including consideration of application for temporary passporting regime with the FCA

3.    Fund distribution impacts

  • Check that your UCITS or AIFMD funds have applied to the FCA for Temporary Permissions Regime for those funds currently marketed in the UK
  • Engage with UK (or other) clients on possible impacts of a no-deal Brexit on their fund holdings
  • Assess impact to your client onboarding, know your customer, and anti-money laundering procedures for UK clients into EU funds given the UK will become a third country in need of equivalence

4.    Delegated services for regulated funds

  • Review the recently signed MMoU between national EU/EEA regulators ESMA and the FCA for impacts to your business model
  • Assess your fund manager delegation model for portfolio/investment management to the UK
  • Assess the status of UK Board Members and appointed fund delegates, designated persons and approved controlled functions located in the UK for Irish and Luxembourg funds

5.    MiFID firms

  • Assess the effect a no-deal Brexit will have on current use of MiFID passporting from the UK
  • Verify areas of MiFID which have regulatory equivalence considered and those that do not
  • Check all contractual arrangements and Investment Management Agreements for your segregated mandate and other institutional business for no-deal Brexit impacts

6.    Investor engagement plan

  • Take stock of your client expectations on Brexit regarding enquiries or informational requests around March 29
  • Conduct a scenario analysis projecting subscription redemption activity considering a no-deal Brexit  
  • Produce an investor FAQ document for your client service representatives on Brexit impacts to assist with probable enquiries from your investor base

7.    Contractual review

  • Review all fund literature and legal agreements for any changes or impacts (e.g. governing law, intellectual property rights, etc.)
  • Confirm which country law will govern cross border contracts when UK exits the EU in a no-deal scenario
  • Establish whether or not a no-deal Brexit scenario may be legally deemed a material adverse change or force majeure event within existing contracts  

8.    Taxation

  • Assess the possible consequences to continued access to treaty benefits for UCITS and AIFMD funds
  • Assess the value added tax (VAT) implications on UK derived services in the case of a no-deal Brexit scenario
  • Assess impact of transfer pricing for service providers located in the UK

9.    Data protection / data transfers

  • Take stock of the impacts when the UK becomes a third country under the EU’s General Data Protection Regulation (GDPR) and will not receive an “adequacy” decision by March 29, which may have a direct impact on your data transfers between your firm and UK service providers post-Brexit
  • Review your contracts and agreements for GDPR standard clauses to deal with data flow from EU/EEA to/from UK; do you require alternative data transfer mechanisms in the case of a no-deal Brexit scenario?
  • Be conscious of the expectations of the UK Information Commissioners Office as outlined in their transition guidelines. Work to implement “appropriate safeguards” for post Brexit data transfers between UK and EEA

10.    Market Infrastructure

  • Verify with your UK-based trading counterparties there are no additional no requirements or amendments to your existing trading relationships in a no-deal Brexit scenario  
  • Familiarize yourself with recently agreed memorandum of understanding between ESMA and the FCA and its impact on credit rating agencies and trade repositories
  • Note that the recently agreed MMoU, allows for the continued use of the existing UK Central Securities Depositary, CREST, for Irish securities, and Irish ETFs will continue for the foreseeable future


Some Key Brexit Regulatory Terms 

Third Country refers to any country that is not a member of the EU. In some cases, legislation provides for a “third country regime” which allows the non-EU firm provide services in the EU if their home country regulatory regime is deemed “equivalent” to EU standards.

Passporting allows EU regulated entities from one-member state to conduct activities across all EU member states without requiring local regulatory approval in each member state. Applies to banks, asset managers, insurers, and certain funds. 

Equivalence is a reciprocal regulatory arrangement where the EU declares that the regulatory standards of a third country in a defined area are sufficiently close to its own. Equivalence is normally agreed upon for the mutual benefit of both the EU and the third country and very broadly considers the rules and standards of the third country’s firms as compliant with the EU regulatory framework.

2017 US ETF Investor Survey Results

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