FCA and ESMA announce agreement of co-operation arrangements in the event of a Hard Brexit

4 February 2019
By Jin-Hyuk Jang, Patricia Volhard, Simon Witney, and John Young

Last week, the FCA (the UK’s regulator) and ESMA (the pan-European supervisor) announced that a multilateral Memorandum of Understanding (MoU) has been agreed to facilitate exchange of information between regulators in the event of a hard Brexit. This is excellent news for firms that have been making contingency plans for a hard Brexit at the end of March – an outcome that remains very much on the table. However, firms must wait for publication of the MoU before being able to confirm its scope.

For a private fund manager, there are three main circumstances in which this MoU may be crucial.

First, the Alternative Investment Fund Managers Directive (AIFMD) makes it clear that, if an EU fund manager (AIFM) – for example, one based in Luxembourg or Ireland – wishes to delegate portfolio management or risk management to a person located in a non-EU country (which, after a hard Brexit, would include the UK), the delegate must be locally authorised or registered for the purpose of asset management and the delegate’s regulator must have signed a co-operation agreement with the regulator of the AIFM. AIFMs that are regulated in Luxembourg or Ireland which delegate functions to a UK firm were therefore waiting for confirmation that this MoU would be in place. (UK law will also require these arrangements if a UK AIFM wishes to delegate to an EU firm, although this is less common.)

Secondly, the AIFMD requires a co-operation agreement for an EU AIFM to manage a non-EU fund, meaning that this MoU is critical for structures in which a Luxembourg (or other EU) AIFM wants to continue to manage a UK limited partnership fund (or to do so in the future). Similarly, UK law (as adapted for hard Brexit) will only allow a UK-regulated AIFM to manage funds that are domiciled in countries in which the regulator has signed up to an MoU with the FCA, meaning that it was essential that co-operation agreements were signed in order to allow UK AIFMs to continue to manage their Luxembourg funds – now a very common structure.

Finally, many UK fund managers will want to take advantage of national private placement regimes (NPPRs) in the future, so that their funds can be marketed in the EU without a passport. And EU managers will also want to market their EU funds in the UK and, perhaps, their UK domiciled funds in the EU. Co-operation agreements are required in each of those scenarios.

At the moment, the text of the MoU has not been released, so its precise scope is not known. The press releases refer only to “outsourcing and delegation”, so it is not certain whether the MoU that has been agreed will facilitate all of the activities referred to above. We will issue a further update once the text is available, but this is a significant step forward for firms engaged in Brexit contingency planning.