Fund houses are having to seek temporary permissions to continue trading some funds in the UK market after the UK leaves the EU
Like an angry rain cloud promising to burst Brexit looms on the horizon. When it comes to your centralised investment proposition, what are the major issues you need to consider before the storm?
If you provide investment advice to clients, whether you outsource to a discretionary fund manager or run an in-house proposition, there are some fundamental considerations. First to consider is Ucits funds, or more specifically, Ucits funds NOT domiciled in the UK.
For those unfamiliar with a Ucits – or undertakings for the collective investment in transferable securities – it’s the European Commission’s regulatory framework that creates a consistent regime throughout the EU for the management and sale of funds. Ucits funds can be registered in the EU and sold worldwide. Ucits fund providers who meet the standards are exempt from national regulation in individual European countries.
So what does this mean in reality? A fund can be domiciled in Dublin where it would be regulated by the Central Bank of Ireland. However, as it follows the Ucits framework, it would be recognised by the FCA as a fund that can be marketed and sold in the UK to retail investors using passporting permissions.
At this point you could be forgiven for thinking you don’t need to worry – you don’t hold any overseas funds. Even so, I would urge you to review the funds your firm uses. You may be surprised.
If the UK was to depart the EU without a deal on 31 October 2019, there would be no transition period – EU law would stop applying to the UK immediately. Therein lies the problem. Without delving into the nitty gritty, the current EU regulatory passporting arrangements will no longer apply to any non-UK domiciled Ucits funds passporting into the UK.
Under current FCA definition, any funds not authorised or recognised by the FCA are unregulated collective investment scheme funds, and as such without a solution in place these Ucits funds would become unregulated funds come Brexit.
In light of this issue, HM Treasury has put plans in place to ensure, in the short term, Ucits funds can continue to passport into the UK following a no-deal Brexit. These temporary permissions will allow current Ucits to continue to market and sell in the UK for a period of up to three years.
These permission won’t be automatically granted. Each Ucits fund must apply for it prior to the deadline on 29 October 2019.
When these temporary permissions expire you must apply for full FCA approval. This means the Ucits will potentially need to be managed and run in an FCA-compliant manner, as well as run and managed in an EU and UCITs-compliant manner.
Ucits fund managers may be reluctant to adopt two sets of regulation and may therefore make the decision not to apply for FCA authorisation. This is a worry. If the fund doesn’t apply for full FCA approval at three years then the fund will become ‘unregulated’.
Action to take
You need to identify whether any of your clients hold Ucits funds and whether you recommend any Ucits funds in your investment proposition. You should also liaise with your discretionary fund manager to ensure they have identified where they hold Ucits funds.
If you identify your clients or DFM are currently holding Ucits funds, or one of your preferred funds within your investment proposition is a Ucits, you should contact the relevant fund manager urgently to establish whether the fund has applied for the temporary permissions. If not, do they intend on applying? You should also seek some understanding of the longer-term intentions of the fund in terms of continuing to sell and market in the UK.
If you find a Ucits that hasn’t yet applied for temporary permissions, you should consider the impact of this seriously. Without the temporary permissions the funds will become unregulated, leaving your clients holding UCIS funds post Brexit on 31 October 2019.
Next to consider is UK-domiciled Ucits funds. These funds face a similar issue, but in terms of passporting out of the UK.
In preparation of a no-deal Brexit, a number of large, high profile fund managers have made the decision to set up Luxemburg Sicavs (open-ended collective investment schemes) and put in place a feeder fund from the UK-domiciled Ucits. This allows them to move EU client assets from the UK-domiciled fund into the Sicav version. In some cases, this move of EU assets will see fund sizes drop significantly.
The final thing to add to your to do list is to identify whether you hold any UK-based Ucits (there’s a strong chance you will). You should then question the fund manager over whether any major changes, such as those above, are taking place in preparation for Brexit as these may impact your fund selection process – you may have set parameters in place that a fund must meet to allow it be on your preferred list. These changes may scupper some of your quantitative fund data, and mean that a fund no longer meets your minimum requirements.
Identifying and dealing with these key risks now will give you some piece of mind when that looming Brexit rain cloud finally does burst.
Carla Langley is a business risk consultant at Threesixty