On 29 March 2019 – just over one year from now – the United Kingdom will leave the European Union (assuming that all goes according to the UK government’s current plan). And – although we really don’t know much more about the shape of the UK’s future relationship with the EU than we did a year ago – firms have no choice but to plan for that dramatic event. In making those plans, they have to make cautious assumptions, but still hope that the outcome is not as bad as it might be.

Obviously, Brexit affects a lot more than financial services regulation – and most private equity investors are acutely focused on the risks for their portfolios of a disorderly Brexit, or one that leaves trade barriers and tariffs in place that disrupt cross-border trade. But many UK-headquartered firms, or those with a British subsidiary or branch, are actively planning their future fund structures (and even restructuring existing funds) to mitigate the impact of the UK losing its passporting rights, which appears to be a likely outcome. Any that were not already working on their Brexit plan had a wakeup call from the European Commission earlier this month, when it issued a Notice to Stakeholders explaining the consequences of the UK’s withdrawal for managers of Alternative Investment Funds (and UCITS, the EU’s regulated fund product for retail investors).

Although the Commission’s Notice didn’t say anything new or surprising, it is perhaps a little alarmist because it assumes that there will be no transitional arrangements – an outcome which would be surprising, and about which we will know a lot more in a month or two. However, it is clearly important that firms develop a plan in the event that no transitional period is agreed, or that one is agreed but it does not preserve the status quo. If time is of the essence – and one year is not long to plan and implement a completely new European structure – then it would be prudent to evaluate the issues that the firm would face if the UK does become a third country for the purposes of EU regulation in March 2019, as the Commission’s note assumes, and to have a contingency plan that can be activated quickly if the politicians can’t reach agreement in March or April.

In any event, a transitional period is not a panacea. Some contractual provisions will need to be amended (look closely at the definition of “Europe” in your investment policy, for example), and regulated European investors – especially insurance companies and many pension funds – may request or require a structure that is Brexit-proof even before the end of 2020 (meaning that they will want a fund vehicle located in a country that is remaining in the EU, managed by a manager established in such a country).

However, those who can safely defer consideration of their post-Brexit structure may reap some rewards. The UK government is pushing for a long-term relationship with the EU that would allow UK firms to have privileged access to European investors for as long as UK regulation remains “consistent” with the that of the EU. As noted in a recent edition of European Funds Comment, such an arrangement might appeal to the European Union, who will fear regulatory divergence and competition. We are a long way away from being able to predict that outcome with confidence, but it should not be ruled out.

In the interim, the European Commission’s Notice does serve as a useful checklist for those who are planning for the worst – whether that is in March next year, or at the end of a transitional period that is expected to last until at least the end of 2020. It points out the obvious: that UK authorised Alternative Investment Fund Managers (AIFMs) will (in the absence of a negotiated EU/UK agreement) become third country managers and will lose their passporting rights; and that EU27 AIFMs will only be allowed to manage funds established in the UK (usually English or Scottish limited partnerships) if a co-operation agreement is concluded between the UK and their home territory. It reminds those engaging in restructuring that an EU manager must have substance in the EU, and that delegation to a non-EU firm is subject to strict requirements (recently elaborated by ESMA, the pan-European supervisor). And it identifies some less obvious impacts, including the need to check contractual provisions that refer to the European Union, and to notify investors of any “material changes” – which might include the consequences of Brexit – in their annual report.

But it is not only UK-based managers that should be ready for the UK’s departure from the EU. European investors are also aware of the impact Brexit will have for them. These consequences are not limited to the regulatory significance of becoming an investor in a non-EU fund overnight, but also the potential loss of investment opportunities once UK funds cannot easily market to them. That will be especially problematic for investors in countries like France, Italy and Spain where private placement is either hard or impossible. Those investors will, no doubt, be hoping that a deal can be reached – both during a transitional period and beyond. But they too must prepare for the worst.