Following the UK’s withdrawal from the EU, the UK and the EU entered into a free trade agreement in January 2021. The treaty did not address the EU-UK relationship in financial services, instead indicating they would enter into a framework for regulatory co-operation and make “equivalence” decisions as the basis for cross-border provision of financial services, without any commitment for the EU and UK to make such decisions.
While some EU directives contemplate access to EU markets by financial services firms established in third countries deemed to have equivalent standards, even if UK law remains equivalent to EU law, there is no certainty the EU will facilitate the equivalence decisions referred to in the agreement.
In March 2021, the UK and EU agreed a memorandum of understanding to create a “framework for voluntary regulatory co-operation in financial services between the UK and the EU. The MoU will establish the Joint UK-EU Financial Regulatory Forum, which will serve as a platform to facilitate dialogue on financial services issues.” However, there is no indication of progress on equivalence.
With the loss of the EU marketing passport, UK managers must market their funds to EU professional investors under the national private placement regime (NPPR) as set out in Article 42 of the Alternative Investment Fund Managers Directive. Most relevant EU jurisdictions provide for a NPPR. However, NPPR implementation varies across these countries and can result in different requirements and additional costs. In jurisdictions without a (practical) NPPR, marketing is not possible.
Fund marketing in the EU will likely become more challenging. Most acknowledge that private fund marketing, while not falling within the classic ‘mould’ of retail distribution activities the Markets in Financial Instruments Directive invariably applies to, is likely regarded as regulated activity in many EU jurisdictions.
In AIFMD terms, this raises an acute risk for UK firms that conduct marketing on behalf of AIFMs without the continuing cover of the MiFID marketing passport. This will be exacerbated by the implementation of the EU cross-border distribution of funds directive by member states from August 2, 2021, which will amend AIFMD to require that a third party
engaged in ‘pre-marketing’ on behalf of an AIFM is authorized as an investment firm in accordance with MiFID or as a credit institution, a UCITS management company or an AIFM, or acts as a tied agent to a MiFID firm.
This provision potentially results in UK authorized investment firms not being permitted to provide information or communication on investment strategies or investment ideas to potential professional investors in order to test their interest in a fund.
Marketing funds under NPPR is a well-established concept and UK fund managers are able to deal with it. More problematic is the involvement of third parties (group IR teams or placement agents) in the marketing process. UK firms have considered several solutions as Brexit contingency plans: setting up an EU-based subsidiary with the relevant license, using EU host AIFM structures for chaperoning or tied agent solutions, various secondment models, or ensuring the UK firm only conducts non-regulated activities.
Patricia Volhard is a partner and Jin-Hyuk Jang and John Young are international counsels at Debevoise & Plimpton