It is interesting to see however, that larger UCITS managers are taking pragmatic steps to ensure that they have contingencies in place that allow for all eventualities. The larger managers are doing all in their power to ensure that they continue to provide a gold standard service to their customers after Brexit.
As we face into a period of high volatility and likely market declines in specific regions, UCITS fund managers are thinking of how best to protect their customers’ interest. It is for this reason that we are seeing an onslaught in the creation of mirror funds.
As it is unclear at this stage as to whether UCITS funds registered in the UK will be able to market in Europe once the Article 50 deadline is reached, it is important for UK fund managers to consider the worst case scenario and how best to continue to serve their customers with minimal disruption.
UK UCITS fund managers know that in a worst case scenario they will lose their UCITS status upon the UK leaving the EU, thus becoming a ‘non-EU Alternative Investment Fund (AIF)’. With this new status the funds will immediately lose their EU passporting authority and cannot be distributed across the twenty seven EU countries. Losing EU investors is something that the current UK UCITS fund managers can ill afford to do.
One contingency approach adopted by Barings, Crux, and Schroders is the use of EU based mirror funds. These mirror funds have the same investment guidelines as existing unit trusts to ensure that UCITS fund managers can give their customers contingency options in the event of issues with the European marketing of UK funds.
But what about the EEA UCITS funds that want to continue marketing in the UK after the 29th March 2019? The FCA has published two draft directives relating to Brexit that will establish a Temporary Permissions Regime (TPR). These directives allow EEA funds that currently market in the U.K. under an EEA passport to continue to do business for three years after the 29th March 2019. Neither of the draft directives are, as of yet, in force.
Under the draft AIFM (EU Exit) Regulations 2019, EEA AIFs, EU VC Funds (EuVECAs) and EU Social Entrepreneurship Funds (EuSEFs) will be able to be marketed in the U.K. post-March 2019.
Under the draft CIS (EU Exit) Regulations 2019, EEA UCITS that currently market in the U.K. under an EEA passport can continue to access the U.K. market post-March 2019. An operator of an EEA UCITS within the TPR will be able to market new sub-funds in the U.K. post-Brexit, subject to certain conditions. The FCA has yet to publish directions in this regard.
Whatever the fate of UCITS funds under UK law will be, the reality is that UCITS managers must remain vigilant regarding excellent service to their customers while remaining compliant to their governing body, be that EU or UK, or risk losing investors.