Brexit: No immediate fund regulatory changes expected – Duff & Phelps

A number of experts in funds regulation and taxation services at Duff & Phelps have commented on the impact of the Brexit vote on the industry, but noted that any changes are unlikely to be immediate while in some areas they do not expect changes per se because UK legislation is already putting in place measures that would provide equivalency to existing EU demands.

Julian Korek, global head of Compliance and Regulatory Consulting, wrote that it is a certainty that the funds industry will continue as normal for some time, and that even when notice is given under the so-called Article 50, sparking a minimum two-year negotiation period, it may be that investors should not necessarily expect “a great deal of change in teh arena of financial services since the UK is likely to adopt most EU legislation in this area.”

“The UK was a big part of the drafting process for EU Financial Services regulation and will, at least in the short-term, wish to retain much of it. Practically, the [UK] government will not wish to risk destabilizing the financial services industry by subjecting it to additional disruption and uncertainty. Much of EU financial services regulation has been in the form of Directives, which have already been transposed into UK law and Financial Conduct Authority rules. The wholesale adoption by the UK of current EU regulation would ensure the UK’s regime could be deemed ‘equivalent’ to EU rules. However, such equivalence is not automatic and achieving it requires an equivalence assessment by the EU authorities.”

“The implication for UK fund managers depends heavily on what products they offer and the location and nature of their clients. As many funds and managers raise assets globally, the asset management industry has proven resilient to pressures before.”

“Regardless of whether the UK operates under an EEA model or detaches itself entirely from the Union, AIFMD, Mifid II and Mar would almost certainly continue to apply under UK law after a Brexit. Of course [the UK] regulator will have little if any influence on future policy development. However, it’s hard to envisage the UK government having much appetite for further change, given the tsunami of regulation we currently face.”

The key change, Korek adds, will come when UK managers and funds become defined as ‘third-country’ and ‘non-EU fund managers’. This will hit areas such as marketing, soliciation, passporting and operations.

“The future effect on the industry of such issues will inevitably depend on the stance the UK takes in its policy negotiation with the EU.”

Korek notes that this does not automatically mean that businesses without a pre-existing presence in an EU jurisdiction will be required to establish such a presence in order to do business in the EU. “While this will inevitably require planning and investment, the good news is that this does not necessarily entail moving lock, stock and barrel to an EU country.”

However, for those that have set up business to be fully AIFMD and Ucits compliant on the basis of operations, regulatory permissions and status being in the UK, may need to consider a base elsewhere in the EU, either permanently “or until the UK can obtain a third-country passport”.

Portfolio valuations

Ryan McNelley, managing director at Duff & Phelps, addresses the issue of portfolio valuations in the wake of the Brexit vote.

“Alternative fund managers will have numerous valuation issues to contend with in reflecting the impact of the UK’s exit from the EU.  Forthright and transparent communication with limited partners and other stakeholders will be key.  The intermediate and long term outlook of private equity and private debt investments – particularly those with exposure between the UK and the EU – will need to be carefully monitored and the impact of their rapidly changing outlook should be reflected in ongoing NAV reporting.”

“Investments with significant FX exposure will also need to be looked at carefully.  Refinancing risks will also be a key consideration if there is a protracted disruption to the capital markets.  Inevitably, any capital market dislocation will create a myriad of distressed and contrarian buying opportunities, but such investments are not without risk which will need to be measured and monitored carefully.”

Taxes and complex assets

Looking to tax issues, Stephen Rabel, managing director, suggests that there will be limited changes in the short term – with the exception being the imposition of any type of ’emergency Budget’ in the UK.

However, longer term, there will be issues to address, such as the “suitability of the UK as a European holding company jurisdiction with the loss of EU concessionary treatment of cross border interest and royalty payments.”

Another change would be the removal of the current EU barrier on state aid. Policymakers in the UK may seek to make more use of state aid which would suggest a greater need for tax revenues.

Manish Das, managing director, meanwhile points to a possible growing need to hedging strategies given how complex investment solutinos may be affected by factors such as cross border regulatory policy.

And Danny Beeton, managing director, notes that in the area of transfer pricing, “debt capacity and interest rate reviews for new private equity investments will be a priority.”


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