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May 2020

While regulators and firms continue to navigate the impacts of the COVID-19 pandemic, negotiations about the future EU-UK relationship continue. Politicians on both sides say they are committed to the transition period finishing at end-2020. After then, barriers to the cross-border distribution of funds and asset management services between the EU/EEA and the UK will be raised in both directions.

It is generally presumed that the EU and UK regulatory regimes will continue to be aligned in the short term, but in the medium term will tend to move apart, as the EU reduces its dependence on what is now a third-country financial centre and the UK looks to serve other financial markets operating under its own rules. This points to an increasingly fragmented rule book for global players - counter to repeated industry demands for open markets and a level playing field at global level.

It could also mean greater pressure on regulators to avoid extraterritorial impacts and to accept supervision in other jurisdictions. However, Brexit has focussed attention on the different third-country rules in EU legislation. Some member states strongly object to, what they regard as, “free” access for third-country firms to EU markets, even though MiFID II/MiFIR allows asset managers to delegate portfolio management services to third-country firms only if an equivalence judgement is in place. The nub of industry concerns has been that the equivalence process is not transparent or time-certain, and that an equivalence decision might be suspended or withdrawn with insufficient notice for firms to make alternative arrangements. The European Commission's Communication of July 2019 did not lessen those concerns.

However discussions develop, it is clear that asset managers and investment funds will have to navigate a more complex and fragmented market place, as they seek to recover from the impacts of the pandemic. Firms that put their Brexit plans on hold, while focusing on their own resilience and managing heightened liquidity risk in open-ended funds, need to re-activate them. There are other, more positive indicators, though. The Commission is focussing again on remaining barriers to distribution within the EU, the UK government is seeking to mitigate the immediate impact of the new border, and Switzerland has introduced new laws that should help EU and UK asset managers to do business there.

For news on other borders around the globe, look out for our Evolving Asset Management Regulation report 2020……coming soon.

Distribution within the EU

The Commission is looking to boost retail fund distribution within the EU, amid concerns that banks remain too dominant across distribution channels. It is reviewing several pieces of regulation, including MiFID II, AIFMD and the UCITS Directive. It issued a call for tender in March 2020 for analysis of the disclosure, inducements and suitability rules, and is now consulting publically until 8 September 2020. The consultation paper is entitled, “An intra-EU investor protection and facilitation initiative”.

The Commission notes that private investments are of key importance to create business and work opportunities and generate sustainable economic growth. Moreover, to meet its commitments relating to climate change and digitalisation, the EU will need to mobilise vast financial resources, mainly long-term, in the years to come. In the climate and energy sector alone a yearly investment gap of €260 billion will need to be covered by private investments. Cross-border investments within the EU will play an important role in mobilising additional funding. However, evidence suggests that, among other factors, investors' low confidence in the rules protecting their cross-border investments and in their effective enforcement can play an important role in holding back citizens and businesses from investing in another Member State, says the Commission.

The consultation therefore seeks views in five areas:

  • general questions about respondents' familiarity with cross-border investments and linked issues
  • rules to protect intra-EU investments
  • enforcement of intra-EU investment protection rules, including dispute resolution mechanisms and remedies when issues related to cross-border investments arise
  • general questions to assess the overall EU investment protection framework
  • measures to facilitate and promote cross-border investment

The Commission is also considering the interim report of its high-level working group on Capital Markets Union, which included recommendations on how to refresh the CMU project, widely viewed as treading water. Regulatory divergence between EU member states must be ironed out, the report said, if CMU is to succeed. CMU is also being assessed by the European Court of Auditors, which is examining whether efforts to diversify funding for EU companies, especially small- and medium-size enterprises, and to foster more integrated markets have been successful. Commission President, Ursula von der Leyen has made the completion of CMU one of her key objectives for the next five years.

The UK seeks to ease the immediate impact

HM Treasury released a statement on 25 March, outlining the government's intention to retain the regulators' temporary transitional power (TTP)  - introduced in case of a no-deal Brexit - for a period of two years from the end of the transition period. The FCA will use the TTP after the transition period as previously communicated in relation to exit day. Therefore, in all but a few areas, firms do not need to have completed preparations to implement changes in UK law by December 2020. Transitional relief will be granted on a broad basis for 15 months after the end of the transition period (i.e. until Thursday 31 March 2022).

Specific uses of the TTP, in particular those relating to some of the new requirements on firms entering the Temporary Permission Regime, are expected to remain as previously published. Application of the TTP to new or changed EU requirements, due to become applicable during the transition period, will be considered as part of the ongoing legislative process in relation to those provisions.

EU/EEA funds wishing to distribute into the UK could face increased red tape after the transition period, because they will have to go through a formal recognition process to be able to market to retail investors. To mitigate this impact, the government has proposed a special recognition regime for such funds. The Overseas Funds Regime will provide two equivalence regimes - one for retail funds and one for money market funds. The government will make an equivalence determination in respect of an individual member state's (or a third country's) regime, rather than on an individual fund-by-fund basis. Factors involved in making the determination will include the level of investor protection for retail funds, the comparability of the regulatory regime, and the supervisory co-operation arrangements between the FCA and the other country's regulator.

Switzerland lowers its border

The new “FINSA” and “FINIA” rules, which came into force in January and allow firms a two-year transition, are closely aligned with MiFID II and should facilitate cross-border trade between Switzerland and the EU. The concept of distribution has been split into two new categories - the offer of financial instruments and the provision of financial services.

Asset managers no longer need a local representative and paying agent if they are selling to “qualified investors”, such as large occupational pension funds or private banks. Foreign sales and marketing staff will no longer have to register with the Swiss regulator, provided they target only professional investors and institutional clients. Firms that sell to retail investors are still required to have Swiss representatives on the ground.

However, a challenge for non-Swiss asset managers is whether they can effectively segment clients into the different investor groups, which are not identical to the MiFID II classifications.

Questions for CEOs

  • Have we re-started our Brexit plans? Do any need to change or be reviewed in case of no future deal being agreed by the end of the transition period?
  • For EU/EEA firms and funds: have we maintained our position within the UK's Temporary Permissions Regime to be able to continue to do business in the UK after the transition? 
  • For EU/EEA firms and funds: have we considered which additional rules we have to comply with post-transition? How advanced are our preparations? Are we confident that we will be in full compliance by March 2022 at the very latest?
  • What issues do we continue to face doing business cross border within the EU? Might we wish to inform the Commission's study?
  • How will or might the new Swiss laws impact our business? In particular, do we have the knowledge to categorise our clients in accordance with the Swiss categorisation?

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