Following the UK’s decision to leave the European Union last month, public discourse has centred on whether the UK’s future relationship with the EU would include access to the single market, and whether that access would be predicated on the agreeing to the free movement of people.
However, Simon Currie, private investment funds partner at global law firm Morgan Lewis, has pinpointed two areas of the financial services sector – those most pertinent to the private equity industry – in which single market access can be achieved regardless of an agreement on the free movement of people.
There are provisions within the Alternative Investment Fund Managers Directive (AIFMD) which allow fund managers domiciled outside of the EU to apply for a passport to market their funds freely within the Union, effectively accessing the European single market.
Similarly, the Markets in Financial Instruments Directive (MiFID II), which is due to come into effect in January 2018, permits third country investment firms to provide investment services to professional clients across the EU subject to registration and approval.
“At least in these two areas, it is possible to have access to the single market without any corresponding commitment or acceptance of free movement of people,” Currie told pfm.
An AIFMD pan-EU marketing passport would need to be recommended by the European Securities and Markets Authority (ESMA). So far ESMA has recommended to the European Commission that Guernsey, Jersey and Switzerland be extended a passport. The Commission has yet to act on this recommendation.
ESMA is also currently reviewing the US, Hong Kong, Singapore, the Cayman Islands, Japan, Isle of Man, Bermuda, Canada and Australia, as reported by pfm.
As the UK already has an AIFMD-compliant regime in place it would be “technically straight-forward” to extend the passport to the UK, Currie said.
“Obviously there may be a political dimension which comes into play about whether the Commission would be prepared to extend the directive to the UK,” he added.
But, obtaining a marketing passport, while potentially straight-forward, may no less be burdensome. At PEI’s Women in Private Equity: Europe Forum in December, delegates concluded that a significant percentage of managers do not feel the benefits of obtaining a pan-EU marketing passport under AIFMD are worth the costs.
“You have to balance the ease of marketing against the weight of further regulation and reporting…I don’t think the benefits outweigh the costs,” noted one GP.
There is also a chance that ESMA will not consider and recommend the UK before its exit from the EU, in which case there may be a period following Brexit in which UK managers do not have European marketing rights. In this case, UK managers would have to apply to each European country in which they wish to market their funds for approval under its national private placement regime (NPPR).
Under the upcoming MiFID II, the Commission must determine that the legal and supervisory regime in the third country in question is equivalent to that under applicable European standards in order to grant permission for investment firms in that country to provide investment services to professional clients across the EU.
The UK will have implemented MiFID II prior to Brexit taking place, and thus it should be straightforward for the Commission to ascertain equivalence, Currie said.
“As part of any negotiations with the EU, the UK ought to be pushing for the Commission to extend the AIFMD passport to the UK and also to make a similar assessment of equivalence of the UK in relation to the Markets in Financial Instruments Regulation, which would then open the way for UK investment firms to provide their services to professional clients across Europe,” Currie said.