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Brexit and Alternative Investment Fund Managers
SL is increasingly asked what Brexit will ultimately mean for
Alternative Investment Fund Managers (AIFMs) based in the UK. Will
UK AIFMs be permitted to continue to manage the Alternative
Investment Funds (AIFs) they have under their remit? Will they be
able to continue to distribute their AIF investments to European
investors post Brexit?
Before we look at this, it's worthwhile having a quick recap on
the background to the Alternative Investment Fund Management
AIFMD was introduced by the European regulator with a view to
creating a framework for non-mainstream investments - predominantly
hedge funds, private equity and real estate investments - although
other alternatives such as investments in UK Traded Endowment
Policies and US Life Settlements were also covered by the
The purpose of the regulation, in broad terms, has been to:
The UK transposed the AIFMD into UK law when the regulation was
adopted in 2013. Therefore, after the UK leaves the EU - which is
likely to be March 2019, but could be as late as March 2021 should
a two year transitional period be agreed - the UK implementation of
AIFMD laws will still apply in the UK.
However, the UK will then have freedom to diverge away from EU
regulation as it develops post Brexit - should the UK choose to do
so of course.
What will happen after Brexit? No one really knows at this
stage. But, as a leading global financial jurisdiction the UK is
very likely to continue to operate a highly regulated Financial
Services industry; and keep pace with regulatory developments in
other markets to ensure equivalence and UK firms' access to
Importantly, the UK will also be able to consider, where
appropriate, a reduction in regulatory intervention where such
regulation is viewed to be counterproductive to the efficient and
transparent operation of markets.
A good recent example of this can be found in the recent
implementation of the EU Solvency II directive in the UK. The
motives behind this are of course genuine. However, there are some
unintended consequences of the directive in the UK that could be
perceived as being detrimental to investors' interests. For
example, Insurance companies will no longer be required to make
public their annual With Profit Returns to the PRA (the UK bank and
insurance company regulator). This further reduces investor
transparency in a product that is already notoriously opaque.
Back to the topic in hand - the ongoing management of AIFs post
It is clear that UK AIFMs operating UK AIFs (or non EU AIFs for
that matter) will be able to continue to do so post Brexit - no
change. As all the AIFs SL Investment currently manages are UK
AIFs, we envisage no problems in continuing with our AIFM remit on
these products post Brexit.
For UK AIFMs managing EU AIFs, there are likely to issues. Post
Brexit, they'll need to gain authorisation from the regulator in
which the AIF is based prior to being able to continue to manage
the fund. As SL doesn't operate any EU AIFs, this won't be a
problem for SL to address.
In terms of marketing and distribution of AIFs to EU investors
post Brexit, this could be more problematic. Post Brexit, UK AIFMs
will lose their AIFMD passporting rights, which currently give them
permission to market their products to investors across Europe. The
EU could provide authorisation to non EU AIFMs (which SL will be
post Brexit) under equivalence - but they don't appear to be in the
mood to do the UK any favours at present.
Alternatively, UK based AIFMs will need to establish a presence
within the EU; remembering of course that this presence has to be
something of substance (i.e. "boots on ground"), and not just a
"letter box" entity.
Again, SL Investment has worked in many EU jurisdictions over
the years - so whilst there may be some additional complications in
distributing AIF product into Europe post Brexit, we don't
currently believe there will be major consequences of Brexit, from
a regulatory perspective, that will be insurmountable and
particularly disruptive to the business.
Alec Taylor (Sept 2017)