Published: 23rd June 2017

Alternative Investment Fund Managers (AIFMs) and MiFID firms need to consider the impact that Brexit will have on their business in the light of recent opinion issued by ESMA to relevant EU national regulators.

The European Securities and Markets Authority (ESMA) issued an opinion on 31 May 2017 to EU regulators advising that a common approach should be adopted by Members States regarding the withdrawal of the UK from the European Union (EU) – commonly referred to as Brexit.

Brexit negotiations began between the UK and the EU on the 19 June 2017. Agreement on a new trading relationship with the EU must be reached by 29 March 2019 (unless an extension is mutually agreed). In the absence of any bilateral agreement between the UK and the EU, the UK will have to trade under World Trade Organisation (WTO) rules. This is the so called “Hard Brexit” and means that the UK will lose access to the Single Market for its goods and services. For the UK financial services sector, it means all access to the highly integrated Single Market in Financial Services under passports or other equivalence provisions will cease from that date.

The UK is a key trading partner in financial services for various Member States. It is it hoped that at least in the short to medium term it will remain so. However, much is likely to depend on whether a Hard Brexit can be avoided. Whilst it should be noted that leading EU politicians and negotiators have expressed a desire to avoid a disruptive Hard Brexit, they have also made it clear that the UK cannot expect as good a deal on market access as enjoyed by EU members and EEA members.

Plan For Hard Brexit

The stance taken by ESMA is to assume a Hard Brexit is likely and to plan on that basis (whilst not excluding the possibility of a bilateral deal between the EU and the UK that will amount to a softer Brexit). On this basis the UK will be classed as a “Third Country” and UK fund managers and MiFID firms will lose any cross-border/single market access they may previously have enjoyed under AIFMD passports or MiFID passports.

FCA has made it clear it expects the senior management of all firms to consider what impact Brexit may have on their business, to assess and identify risks posed and to plan to mitigate and control those risks, including making any required changes to their business to ensure continuity.

Many fund management and MiFID firms will be conducting their own analysis as to the impact of Brexit and the implications for business operations. Some firms see little immediate impact whilst others are beginning to consider whether some functions should be relocated from the UK to another EU country, typically Ireland or Luxembourg.

Brexit Support From Complyport

With a long and deep pool of experience in advising brokers, dealers, asset managers, private equity funds, hedge funds and other alternative investment fund managers, Complyport’s Governance, Risk and Compliance (GRC) team is ideally placed to assist senior managers in assessing Brexit impact, the risks arising and what mitigation should be considered and implemented.

Given that ESMA’s opinion provided to EU national regulators is to plan for a Hard Brexit, fund managers and MiFID firms should do likewise. By all means hope for the best, but in the meantime plan for the worst.

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