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DESPOSITARIES - deal or no deal?

With the current frantic activity in Westminster the default position remains that the UK leaves the EU on 31 October 2019, with or without a deal. Alternatively, if the law is passed in time and an extension is requested from the EU, the current uncertainties may continue. 

Papers published recently by HM Treasury and the Financial Conduct Authority (FCA) set out the current state of the UK's planning for a hard Brexit, if the decision is taken to exit without a deal on 31 October 2019. Here, David Price, Senior Manager at Estera Depositary (UK) Limited, explains what depositaries need to know in order to prepare.

In the event that the UK opts to leave the EU without a deal at the end of October, EU provisions that have historically been implemented into UK law will need to be amended in order to work effectively. The FCA Handbook will be updated to refer to new or revised UK legislation, rather than the EU equivalent, and references to EU law will be amended accordingly.

As far as depositaries are concerned, the UK will have implemented the guidance rules of the Alternative Investment Fund Manager Directive (AIFMD) into UK law and, although the provisions for depositary companies will become more UK-specific, in reality they will mirror the regulations already set out by the EU and in practice we can expect little disruption.

There will be no change to the depositary requirements for UK-registered AIFs, for example. The depositary must be incorporated in the UK, must be operated in the UK and must have a place of business in the UK. The existing AIF definition in the UK provisions will remain and depositary services for non-EU funds operated by UK AIFMs will continue as normal.

In certain circumstances, however, passporting of non-UK funds into the UK will continue for a limited period. This will apply to recognised funds before exit day that are subject to the temporary permissions regime, after which cross-border marketing using passports will cease and arrangements for individual recognition will need to be made with the FCA under section 272 of FSMA.

The UK will effectively apply the AIFMD third country rules for the marketing in of funds, so EU AIFMs' passports will cease to operate in the UK and cross-border marketing of EU AIFs under AIFMD will cease (subject in both cases to the temporary permissions regime). Once outside the temporary permissions regime, the AIFM will need to meet the relevant national private placement regime provisions in order to continue marketing in the UK.

Marketing rules will change in the EU under AIFMD II. The text of the new directive and proposed amendments have now been agreed and a two year implementation period began on 02 August 2019, with the new rules being applied from 02 August 2021 by all EU member states. We will outline the main changes in our next bulletin.

The UK authorities and EU/EEA national authorities have moved swiftly to sign bilateral Memorandum’s of Understanding (MoUs). These bilateral MoUs will allow uninterrupted information-sharing and supervisory cooperation and will only take effect in the event of a no-deal scenario. EU AIFMs may still continue delegating parts of their management activities to UK firms by virtue of the MMoU and as permitted under AIFMD.

The FCA has confirmed the deadline for notifications for the temporary permissions regime (TPR) will be extended to the end of 30 October 2019. TPR would allow EEA-based firms passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation. It will also allow EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK.

The FCA have also confirmed it intends to extend the proposed duration of the directions issued under the temporary transitional power to the 31 December 2020. This is to reflect the extension of Article 50. Other than the additional time the FCA’s approach remains unchanged. The temporary transitional power is intended to minimise disruption for firms and other regulated entities if the UK leaves the EU without a withdrawal agreement. Under the power firms do not generally need to prepare now to meet the changes to their UK regulatory obligations that are connected to Brexit.

Clients concerned about the impact on their business can click here for further information on the Draft AIFM (Amendment) (EU Exit) Regulations 2018, or get in touch with David Price or Gerry Warwick at Estera Depositary (UK) Limited for guidance.

Estera provides specialist depositary services to alternative investment funds focused on private equity, real estate, infrastructure and esoteric alternative funds investing in both developed and emerging markets. Estera Depositary (UK) Limited is an independent company within the Estera group and has assisted its clients in understanding the requirements of AIFMD. We are working with clients to ensure a seamless transition when the UK leaves the EU. 


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