And, this is just one of the many unknowns facing the financial services sector ahead of the referendum.
UK domiciled vehicles regulated under the undertakings for collective investments transferable securities (UCITs) EU directive would unsurprisingly get the short end of the stick in a post-Brexit scenario and “may need to be radically restructured.”
While it’s uncertain whether the UK could remain a domicile for UCITs or management companies if Brexit occurs, the worst case scenario is that “current UK UCITS will have to be migrated/relocated to an EU member state (and re-authorised) or cease being a UCITS,” the solicitors said.
Hogan Lovells funds partner, Erik Jamieson, identified the ability to access capital as the greatest potential threat to alternative investment funds (AIFs). “The EU framework under AIFMD currently allows for the free movement of capital across borders. A Brexit outcome could cause potential barriers to fund managers in the UK who want to tap into European investors.”
Listed funds would likewise feel the effects of a Brexit. “A post-Brexit world would see the LSE’s Main Market and the Specialist Funds Market lose their status as EU regulated markets.”
In an effort to keep these markets competitive, the UK could attempt to negotiate for equivalent market status. However, Jamieson emphasised that fund managers’ biggest misconception is that the red tape rules around EU legislation would necessarily be removed.
“No one knows whether that will be the case,” he said. “If Brexit does occur, the UK will want to access as many of the EU financial services frameworks as it can. In order to make use of the third country provisions, it will need to have adopted the equivalent legislation, thus retaining a lot of the red-tape laws, rules and regulations UK fund managers might not like at the moment.”
The Hogan Lovells lawyers conceded it would be difficult to fully gauge the impact of Brexit, given that “much would depend on to what extent (and when) UK implementing legislation would be repealed.” It’s likewise difficult to ascertain the extent of the UK’s bargaining power in retaining some of the benefits of EU regulation, such as marketing freely throughout the EU and obtaining management passports.
“Some people think they know what Brexit might look like but no one really does,” Jamieson concluded. From a legal and regulatory perspective, it’s still very much “the big unknown.”