Whether the UK retains its existing AIFMD rights or is required to apply through the equivalency process will only become clear as negotiations progress. The latter scenario is much more likely, but given that the regulatory regime in the UK already matches that of the EU, the process of bringing forward the approval of an AIFMD third country passport should be relatively straightforward.
If the UK’s regulatory landscape substantially changes, we can expect the European Securities and Markets Authority (ESMA) to take a tougher line on passporting, pushing the UK further down the queue. Any gap in passporting rights could create significant upheaval and high costs for re-routing and restructuring funds. It would also raise questions about pre-existing investors around ongoing marketing, and parallel vehicles may need to be established. A sensible compromise is necessary to avoid increased fragmentation of the industry and costs which investors will ultimately end up bearing.
Will fund managers leave London?
Although London’s power as a global financial centre may be called into question should the UK lose its broader passporting rights, Britain remains a large economy with a significant investor base. Despite this, its focus could shift from being an operations centre for the majority of European fund managers, to a base which primarily supports UK investors and fund structures.
The impact on the rest of Europe is potentially disadvantageous. On one hand, a loss of the UK’s passporting rights could encourage mangers to move their European operations to other jurisdictions, which would benefit those locations. On the other hand, should a fund’s primary investor base be the UK, we could see those products re-domiciled to the UK and become unavailable to European investors.
Any requirement for fund managers to move their operations away from the UK will very much depend on the wider outlook for its financial services sector. Should London retain its status as a jurisdiction of choice, any movements are likely to be small enough to allow continued marketing in Europe, rather than a large scale overhaul of entire fund management operations.
Tim Thornton is COO, Fund Services, MUFG Investor Services