Fund Distribution and Brexit

Thursday, 23 February 2017

MiFID II will affect the distribution of complex and non-complex investment funds.

At its simplest, distribution of complex products to retail customers will be required to be made on the basis of independent advice and not just on the basis of tied agency services of execution only brokerage services under MiFID I.

Assuming a hard Brexit, UK distributors are likely to confront the prospect of being restricted under the MiFID Equivalence regime of providing services to professional clients only.

Adding the two together, UK distributors may lose the ability to distribute complex investment products to retail customers throughout the EEA.

UCITS Man Co and Distribution
Similarly, under UCITSD, assuming that a UK UCITS Man Co falls outside of the EEA, it will lose it passport to manage an EEA UCITS and will also likely lose the ability to appoint a UK distributor to distribute to retail customers throughout the EEA under UCITSD.

In these circumstances, UK distributors may want to consider appointment of an EEA UCITS Man Co, with delegations of investment management to either a UK investment manager or EEA MiFID investment manager, and appointment of EEA distributors for distribution of UCITS funds to EEA retail customers.

AIFMD and Distribution
Equally, a UK AIFM may be able to manage an EEA AIF on the basis of the Equivalence regime under AIFMD, but will likely be restricted to marketing under domestic private placing regimes of individual host member states, which are likely to be restricted to marketing to professional clients only.

Also there is a further complication of the loss of a MiFID passport for distribution by a UK distributor of an AIF in the EEA.

In the case of AIFs, UK distributors may want to consider appointment of an EEA AIFM with delegation of investment management to the UK as a third country firm and appointment of EEA distributors for marketing to retail and professional clients throughout the EEA.

Authorisations in Ireland
Assuming that a firm wishes to replicate an EU management and distribution model out of Ireland, the most likely authorisations would include authorisation as a MiFID firm, or authorisation as a Super Manco for UCITS and AIFs, or finally as a SMIC, a self-managed investment company.

MiFID Authorisation
Authorisation under MiFID will require that the management of the firm can be demonstrated to be carried on from Ireland and therefore will require a substantive presence with respect to key functions, with sufficient staff and resources to manage risks in compliance with the applicable capital requirements.

Super Mancos 
Super Mancos that perform portfolio management and risk management will require 2-3 Irish directors, 2-3 designated persons in Ireland, and retention of key functions including compliance, risk management, internal audit and Chief Investment Officer function in compliance with minimum capital requirements of €125,000 plus 0.02% of AUM in excess of €250 million up to maximum of €10 million.

Super Mancos that retain oversight of portfolio management and risk management but delegate day to day activities will require 2-3 Irish directors and 2-3 designated persons in compliance with minimum capital requirements of €125,000 plus 0.02 of AUM in excess of €250 million up to maximum of €10 million.

SMIC
A Self-Managed Investment Company that retains oversight of portfolio management and risk management will require 2-3 Irish directors and 2-3 designated persons, with minimum initial capital of €300,000.

Settled Rulebook in Ireland 
In making decisions regarding establishment of Super Mancos and SMICs in Ireland, UK firms can rest assured following completion of the Central Bank’s Consultation Process 86 that the rule book on its regulatory requirements for Super Mancos and SMICs is now settled for the foreseeable future.

For further information a member of our Financial Services team.