With four months to go until the United Kingdom’s anticipated exit of the European Union, the world braces itself for the final ‘divorce’ arrangements to be agreed, and to understand the subsequent consequences of those decisions. With questions still unanswered on how Brexit will impact investment firms, we speak with Joe Vittoria*, CEO and Partner, Mirabella, to examine possible marketing and distribution issues post-Brexit.
Q: What is the current outlook on Brexit?
A: At this time of writing, the political climate and outcome around Brexit is uncertain, oscillating between a hard (no transition, no equivalence), a medium (some allowances) and even occasionally a soft (let’s all be friends) landing. However, since we are less than six months away, it is important to have a plan of action for a hard exit, just in case. Indeed, as the Financial Conduct Authority (FCA) has itself advised, regulated firms should consider if or how they will be affected and what action they may need to take.
Q: In a nutshell, what’s the problem?
A: Put simply, the UK-based people who actually want to market into the EU27 after Brexit need to assess their ability to continue to do so.
Q: Okay, so let’s examine certain scenarios. I am a UK-based hedge fund manager, currently managing a Cayman fund. I have already registered the fund under the local National Private Placement Regime, for example, in the Netherlands and Sweden. Do I have a problem?
A: I always hate saying the following words but, first you should consult with your lawyer since you can’t take legal advice from an article like this one. However, several law firms are telling us that there is a problem, which is that while the funds are indeed unaffected, the UK-based staff who fly to those countries and pitch the fund might need some form of registration. UK firms currently perform these activities by using Mifid passports.
Q: A US-based manager can market a Cayman fund into the EU, without being Mifid registered. How have they been doing it?
A: I agree, it’s a strange situation, but there appears to have been less focus by regulators on this activity in the past. However, we worry about this becoming a renewed area of interest because, come next April, there will be a lot more managers coming in from outside the EU (i.e., the UK).
Q: How does it impact UK AIFMs which have EU AIFs (such as those registered in Luxembourg or Ireland)?
A: Currently, the UK AIFM can market the fund, but after Brexit, all UK AIFMs will become non-EU AIFMs, which means they will lose access to the AIFMD Marketing Passport. These managers will then be similar to the managers who run Cayman funds, so it’s the same as the question above. The choices for UK managers are as follows:
- Do nothing at all, because either:
- the manager no longer needs or is seeking new EU27 investors. Brexit is essentially a non-event for you, so you don’t need to worry much; or
- You want to wait for Third Country status to be bestowed on the UK, thereby allowing UK AIFMs to access the passport under the equivalence arrangements (this is somewhat optimistic in the short term, but is highly likely in the longer term).
- If you care about a few EU27 countries, which have reasonably accessible National Private Placement Regimes, you can simply register in those countries, and limit your marketing to them.
- Establish your own AIFM in the EU27 prior to Brexit. If you haven’t already done this, it’s probably too late, since registration generally takes at least six months, if not more.
- Enter into a hosting arrangement with a third party EU27 AIFM. Many of these firms are capacity constrained and are suggesting that firms need to hurry to ensure they will get on-boarded by February. We see this as mostly good marketing by the Manco, because they want people to commit now, in case hard Brexit does not materialise. We have plenty of capacity, so this is not the message we are sending.
So if you still need to access the EU27 with in-house, UK-based marketing staff, then you need to think about distribution.
Q: Can those who have rented an EU27 AIFM Manco continue to use their AIFMD marketing passport?
A: Yes, and in these cases, the former UK AIFM usually becomes a delegated portfolio manager of the EU27 AIFM Manco. This allows the same people to continue to manage the fund, and the fund will indeed continue to have the marketing passport, but the staff of the UK-based firm cannot automatically use that passport unless the Manco allows them to (which the majority of third-party Mancos do not).
If a Manco does allow it (like our Mirabella solution), the problem is that the manager will need to identify with – that is to say, accept the name of – the Manco rather than the original firm. This may present a branding issue. There are some solutions for that as well but there are always compromises.
Q: What about UK managers who have UCITS funds?
A: This is the same scenario as a UK manager who has hired an EU27 AIFM Manco. If the Manco allows it, you can market under its name. But that is unusual, and you have to use its name and brand, not that of your own firm.
Q: What options are you working on?
A: Firms such as ours are working on a range of viable options. Such options seek to allow UK-based firms to continue to access the EU27 after a hard Brexit but without the need to establish an extensive presence in the EU27, and especially without having to hire people there. There is a school of thought that suggests that a positive equivalence determination may be made by the EU of the UK after Brexit. Should this equivalence determination happen, any recently created firm in the EU27 will be rendered unnecessary, and winding it up in certain jurisdictions may be quite expensive.
We are seeking to ensure that our solution allows the UK firm to be able to use its own branding and email. But we will also offer a solution that allows people to market via our Manco, which is cheaper but has that branding limitation. I suspect no one will bite until the start of the first quarter when the form Brexit will actually take is clearer.
Q: What about hiring an EU27 Third Party Marketing firm?
A: Yes, that works, as long as your funds are suitably registered in each state that the marketing firm will want to access. The problem is that few of these types of firms will sign up for a relatively short period, and if you believe equivalence is coming then you will need to be able to exit this agreement when it does. Also, these firms are not cheap, and you may have in-house marketing expertise you don’t want to lose.
Q: What should firms do?
A: Well, I think the answer right now is to investigate, talk to your legal advisors, figure out if this is an issue for you, then talk to service providers like Mirabella to figure out what options are available and when you will need to decide. I don’t expect anyone to sign up for solutions until January, because of the lack of clarity. It is noteworthy that the FCA has launched its first consultations paper on Brexit. Whilst the FCA is contemplating the creation of transitional provisions for in-bound funds and managers, the same is not currently true of the EU. Whilst those provisions are not yet live, it’s my view that you should be actively contemplating how to secure your distribution strategies for the short and longer term.
*Interview conducted in collaboration with HFM on 19 October 2018
About the Author
Joe Vittoria is a Partner of the ACA Compliance Group and the CEO of Mirabella Group, ACA’s regulatory hosting division. He originally founded Mirabella in 1998, sold a controlling stake in it to Cordium in 2007, at which time he left to pursue other opportunities, but returned in 2012 as its CEO. Prior to working in the hedge fund industry, Vittoria worked at Salomon Brothers from 1985 to 1998.