Although most fund managers and financial firms would have started making preparations for the transition earlier this year, now is a good time to go over the compliance and regulatory checklist to ensure a smooth changeover. For financial firms that operate largely in the UK, a no-deal Brexit is less likely to cause any adverse effects.
With less than a month to go before the UK crashes out of the EU without a deal, the pressure is increasing on UK based financial firms that operate in the EU/EEA to ensure contingencies and temporary arrangements in EEA Member States are in place to make the switch as smooth as possible. "No-deal" Brexit presents a variety of legal and economic issues to financial firms particularly private equity and hedge funds based in the UK and operating between the UK and the EEA.
Malta became a recent addition to the list of Member States who have put in place temporary transitional regimes to allow UK investment funds and firms to transition and operate in Member States. Luxembourg's regulator CSSF was one of the first regulators that provided for a transition for UK based investment funds into the country by way of various methods. However, this 'Olive Branch' of these regulators does not come without its own complexity. The Luxembourg temporary regime came with strict registration guidelines, follow-up deadlines and provided for a case-by-case assessment for entry of UK financial firms in the country. Data has yet to reveal how many UK funds and firms actually notified, registered and made it past the regulator without incurring any penalties. In Malta, most UK firms were given limited interim passporting rights. UK based UCITS management companies, investment firms and AIFMS were granted temporary passporting rights on the condition that such firms would already have been exercising a European right to provide those services in Malta prior to 31 October 2019 and further that these entities will only be allowed to perform contracts that were entered into with clients no later than 30 September 2019.
On the other hand, in the UK, the FCA has put in place a much more stable temporary transition regime giving EEA firms operating in the UK a further extension to register under the regime by 30 October 2019.
Passporting rights essentially enable regulated financial firms registered in one EU Member State to provide cross-border services in another Member State without implementing additional regulatory and compliance measures and incurring additional costs. UK firms operating in the EEA that have not yet made arrangements with regulators of the Member State they operate in or have restructured their funds locally, are likely to suffer a loss of their passporting rights. This could be a serious operational and regulatory hindrance. The loss of passporting rights automatically places a UK financial firm on the footing of a 'third country' firm and can potentially impose significant market-access and regulatory barriers to its operations in the EU/EEA starting from 31 October 2019. It can affect the scope of target-consumers of financial advisors, nature of marketing strategies implemented by the financial firm, insurance arrangements and data sharing arrangements among other things. There has been debate as to whether 'alternative passports' could be used by UK firms to gain market access in the EU/EEA however it is clear from the main EU passporting directives MiFID2 and AIFMD, that the scope of rights provided by those directives is limited and contingent on equivalence and most rights have not yet been activated within the EU legal framework.
Although most fund managers and financial firms would have started making preparations for the transition earlier this year, now is a good time to go over the compliance and regulatory checklist to ensure a smooth changeover. For financial firms that operate largely in the UK, a no-deal Brexit is less likely to cause any adverse effects.
Lastly, a no-deal Brexit is also likely to result in an increase in the scope of the FCA's responsibilities in the months ahead. It seems that the first quarter of 2020 will potentially be a wait and watch period both for regulators and financial firms to fully understand the market impact. Further regulations are likely to be introduced later on in the year.
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