Alternative money managers in the U.K. should use the transition period in which the country will exit the European Union to consider the future state of their businesses and access to the rest of Europe, a new paper states.
The Alternative Investment Managers Association said in its "Brexit and Alternative Asset Managers: Managing the Impact" paper that "it would be sensible to deal with" a number of issues during the transition period.
Assuming the U.K. exits the EU single market, it will become a so-called third country under European Economic Arena rules, the paper said. The EEA rules allow the EU countries and Iceland, Liechtenstein and Norway, to be part of the single market.
Being a third country and therefore no longer being part of the EU "will require U.K. alternative asset managers to change the way they do business with EU investors and clients," said the paper.
One focus should be "equivalence," under which similar frameworks allow third-country firms to provide services to clients in the EEA, on the condition that the rules of their domestic market have been deemed equivalent. "The U.K. should, during the transition period, seek an equivalence determination in respect of U.K. rules by the European Commission that covers the relevant sectoral legislation in which equivalence determinations exist," said the paper.
The country also will need to ensure it has in place equivalence assessments of its own, replacing those it has adopted at the EU level.
The second consideration is cooperation arrangements between supervisory authorities, which AIMA said are often a prerequisite for market access. "However, under existing EU legislation, those arrangements can only be negotiated between EU competent authorities and third-country competent authorities. It is therefore important that the U.K. authorities can utilize the transition period to finalize cooperation arrangements that are necessary, for example, to maintain delegation regimes or allow for private placement of funds," said the paper.
Alternative managers should also use the transition period to consider change-of-status issues, as many U.K. firms are likely to undergo a change under EU law, added the paper.
The paper makes a number of other assessments of what needs to be considered under Brexit, including that the U.K. should seek a deal with the EU to ensure relationships with EEA investors and clients that existed prior to Brexit can continue uninterrupted; and "unilateral openness." The paper said regardless of a transition period, the change in relationship between the U.K. and the EU will require decisions to be made about whether, and to what extent, entities from EEA countries "will continue to enjoy a preferred status for inbound asset management activities" and what the status of UCITS — undertakings for collective investments in transferable securities strategies — will be in the U.K.
"We believe that the U.K. should generally opt for an approach that prioritizes openness over reciprocity. We believe that covering these points would minimize disruption for the alternative asset management industry and the investors it serves," said the paper.
The paper also examines various EU legislation and key issues that might be affected by Brexit.
The paper was sponsored by law firm Simmons & Simmons.