With the start of the new calendar year comes a certain sense of uncertainty for most European Union Member States as they prepare for a British secession from the 28-nation union. For the United Kingdom, even if a decision has been taken on a hard Brexit, a reliable model has so far failed to materialise and this unprecedented development leaves many investors uncertain about what the effect on current European legislative bodies will be.
With this volatility arise doubts about the relevance of certain European regulatory AIF subsidiaries in the near future. Many are concerned about a potential congestion of cross-border transactions, as well as a loss of access to
European Union passporting regimes.
However, it is the firm belief of our lawyers that any established legislative subsidiaries or branches that guarantee from these benefits will not, or indeed, cannot, be repealed as a result of this political shift. We therefore continue to
encourage current European Fund Managers, British or otherwise, to conduct
their business with the knowledge that current EU Authorities such as ESMA will be allowed to continue to safeguard the stability of the current financial
system by protecting investors and promoting ordered financial markets.
Two main directives, the Directive on Undertakings for Collective Investment in
Transferable Securities (UCITS) and the Alternative Investment Fund Managers
Directive (AIFMD) constitute the bulk of the EU initiatives in this regard.
The UCITS V Directive (2014/91/EU), adopted on the 13rd July 2014, provides a
framework for international investment funds that permits them to be purchased by retail investors throughout the EU. It allows authorised funds of any one Member State to be marketed in another through the medium of a passporting mechanism, with more than 29,000 UCITS Funds in the EU, currently representing over 8 trillion euros worth of assets under management.
Real Estate Funds (or indeed hedge funds or private equity funds) have access to the comparable regulations of the AIFM Directive. Covering organisations that do not fall within the UCITS Directive, the AIFMD is in place in major European countries, including the United Kingdom and provides easy access to
multi-national trade, as well as much needed supra-national regulation.
Third Party Membership
One particularity of the AIFM Directive is its ability to extend passports to
non-EU funds, as well as fund managers; creating a potential advantage for investors within the United Kingdom should ‘Brexit’ negotiations be unsatisfactory.
In order for a third party passport to be extended, the European Commission requires positive advice from the ESMA, following a comprehensive assessment. The advances of the past two years are promising as both Jersey and Guernsey have been deemed eligible for passports as well as Switzerland as of 01.01.2016, with further countries being considered periodically.
For example, Canada and Japan have recently been assessed with no obstacles.
It is possible that such advice will in the future be extended for Britain.
As for now, Britain is still being qualified for the AIFMD directive as an EU Member State and its native funds are still able to conduct their affairs within the current framework.
The obligation of legal security (sécurité juridique) also protects companies from a breakdown in European cooperation. This principle, now a fundamental core value of the European Commission, promotes the upkeep of institutions through a series of administrative arrangements.
- the assumption of the predictability of law
- the protection of acquired rights
- the stability of legal situations
Together, they stipulate that a ‘Temporal Axis’ should be respected in the aim of avoiding the destabilisation of established systems as well as the withdrawal of civil rights and liberties from the general public. As such, legal security promotes the right of individuals not to be subjected to the constant withdrawal and replacement of laws and acts.
The principle of “La non-rétroactivité de la loi” (non retroactivity of the new
law) will further protect the sustainability of legislation. A new law may not, in the future, change retroactively existing situations.
In the light of this information, we consider it very likely that British branches or subsidiaries of asset management companies in France should continue to benefit from the existing legal frame work. Although, once the Brexit effective, the steps to be carried out might become more complicated or more uncertain.
Should the British AIF management company not have established a branch or subsidiary in France yet, this is the right moment to do so, thus still benefiting from the European facilitating legal framework.
Cassin, ‘Sécurité Juridique et Complexité du Droit’, Etudes et Documents du
Conseil D’Etat, La Documentation Française, Paris 2006, p.282