Model behavior

Norway model

If Britain chooses to become a member of the European Economic Area, as Norway has, fund managers would continue as usual. As an EEA member Norway has access to the European single market. In return for that access, it pays a contribution to the EU budget and has to sign up to all EEA rules.

The UK government, regulators and industry associations would therefore have less influence on future EU laws affecting the industry, despite having to abide by them.

“This is the most attractive model for fund managers because the UK would retain access to the EU passport for financial services. However, it is the worst from a political standpoint because Norway still abides by the EU free movement laws and pays contributions to the EU budget, therefore it may prove difficult to get accepted,” said Paul Lawrence, head of European funds at Elian.

Switzerland model

This model would require Britain to apply to join the European Free Trade Association and then negotiate bilateral agreements with the EU to govern UK's access to the single market. Although Switzerland has more than 120 agreements in place, none of these allow the country full access to the EU’s internal market for financial services. As a result, Switzerland tends to use passporting from the UK to carry out banking business. 

If the UK was to choose the Swiss model it would not have any AIFMD rights and fund managers would be required to market into European countries using national private placement regimes.

“The EU has labelled this model complex and flawed, making it less likely that it would agree to a similar approach in the event of a Brexit,” Debevoise said in its spring private equity report.

Canada model

Canada and the EU have a free trade agreement, which is designed for trade in goods. It is not clear if Canada’s model provides any assistance for fund managers, as it does not offer full access for services.

If the UK were to adopt a Canada-like model it would mean, for example, that the UK would not be able to export financial services to the EU as easily. Canada and the EU have also been working on a Comprehensive Economic and Trade Agreement for a number of years, but it is not yet in force. A Ceta-type deal would not give UK financial services firms the EU market access that they has now, but the agreement does include liberalization of trade in services and measures to protect foreign investors.

“The upshot is that this would leave fund and asset managers with no passport rights, defaulting to the ‘full scale divorce’ scenario,” said one London-based private funds lawyer.

World Trade Organization rules

If Britain were to adopt the World Trade Organization (WTO) rules, which would happen if the UK does not reach a deal before Brexit takes effect, it would be able to trade with the EU solely on the basis of being a WTO member. However, the UK’s situation is unique, in that all of Britain’s trade commitments had been negotiated by the EU and these would cease to apply in the event of a Brexit. “Britain is a member of the WTO and will continue to be a member of the WTO. But it will be a member with no country-specific commitments. We have had no other situation like that,” Roberto Azevêdo, the WTO director-general told The Guardian.

This model is also the furthest from the current EU-UK relationship and does not cover services. Under this arrangement EU law would no longer apply in the UK, however it would lose the associated benefits of the internal market. In addition Britain would be subject to the tariffs of up to 9 percent which are placed on WTO countries.

“Existing WTO rules have not kept pace with the dynamic nature of today’s financial services world. Therefore, any model based on WTO rules would not be fit for fund managers that want to undertake fund related activity on a cross-border basis,” said John Forrest, head of international trade, DLA Piper.

Full scale divorce

If Britain decides to cut all ties with the EU and does not agree on any exit or grandfathering arrangements either with the EU as a whole or individual member states, UK alternative investment fund managers will no longer be able to market to EU investors under an AIFMD passport and would become non-EEA (or “third-country”) managers, for whom there is no passport.

In order to market to EU investors, managers would be required to notify each member state regulator and comply with those member states’ local regulations under the NPPRs and would only be able to market portfolio management services to EU clients where permitted by individual member states’ private placement regimes, which can be highly restrictive.

“The long term impact on UK asset and fund managers depends on two key factors. First, the terms the Government can negotiate with the EU as regards an exit. Secondly, the business model of individual firms. For example, larger managers with both a UK fund range and a Luxembourg or Irish fund range are better positioned to bear a loss of passporting rights. Smaller managers with a mixed UK/EU client base are generally more dependent on passport rights and so face more risk,” said Matt Huggett, funds lawyer at Allen & Overy.