28 June, 2016
So, the pound’s tanked, world stock markets are in turmoil, Scotland and Northern Ireland are considering whether to leave the United Kingdom so they can stay within the EU and the Prime Minister has announced his resignation. Last week’s vote to Leave the EU has certainly had a profound (and depressingly predictable for those of us who voted Remain) impact on the UK economy and politics already, with a long period of uncertainty yet to come. The financial services industry in the UK is likely to be significantly affected by Brexit, with various international investment banks having now announced that they’re reviewing their operations here, given the uncertainty over whether they will still be able to passport their financial services and products across Europe from London.
But what impact will Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?
Uncertainty
One of the biggest problems with predicting how Brexit will impact anyone or anything remains the uncertainty surrounding the terms of the UK’s exit. We still have no idea what agreement/s will be reached between the departing UK and the rest of the EU on the UK’s terms of exit, with (European Commission head) Jean-Claude Juncker’s earlier comments that deserters will not be welcomed with open arms not making for optimistic reading. Or when the next Prime Minister eventually gives formal notice to leave the EU, will the two year period allowed for negotiations come to an end without any agreement? Not impossible given the initial reactions from our European neighbours, the French presidential election and German federal election scheduled for 2017 – and when you realise that Canada has been negotiating its trade deal with the EU for the last 7 years and that has not yet been ratified.
Managers who excel in periods of market volatility may of course be enjoying the current stock and currency markets turmoil, whether or not the IMF’s views that Brexit would result in a protracted period of heightened uncertainty and volatility on financial markets proves correct.
What about financial services legislation?
For us offshore funds lawyers and your typical Cayman or BVI hedge fund, the questions of what the alternative investment funds industry and its regulation in the UK and Europe will look like post Brexit raise some interesting questions. Historically, the UK government has been a firm supporter of the alternative investment funds industry, perhaps unsurprisingly given the importance of the UK’s financial services industry and the large number of leading hedge fund managers based in London. AIMA’s role in lobbying for the industry has also been very important, in London, Europe and worldwide. Now the UK has voted to leave the EU, we’ve already seen the UK lose a key position of influence at the European Commission, with the resignation of Lord Hill as commissioner overseeing financial services. The government’s influence over the next couple of years on the direction to be taken with future EU legislation affecting the financial services industry can also now be expected to be minimal.
In terms of AIFMD, the timing of the referendum on 23 June came neatly one week before ESMA is due to confirm its views this Thursday, 30 June, on whether to extend the third country passport to 6 more jurisdictions including Cayman, Bermuda and the Isle of Man. Although ESMA is not a political body within the EU and these jurisdictions are not members of the EU, given their links to the UK, is there a risk that these passport decisions will get caught up in the politics of the vote to Leave and those jurisdictions pushed to the back of the queue, along with the UK? Similarly, I’m not particularly looking forward to AIFMD 2 being drafted without the input of the UK’s financial services experts…
Given these uncertainties, Dublin will surely come more into focus as an alternative option for investment managers to move to from London to avoid the uncertainty of where the exit negotiations will leave the UK financial services industry.
Pro-Leave campaigners argued that the financial services industry could benefit from the UK no longer being subject to the complexities of EU legislation such as AIFMD. Indeed, Brexit may end up being an opportunity for those Cayman and BVI alternative investment funds and managers whose main link with the EU is through London. With a bit of luck, the historically fairly generous UK private placement regime for overseas persons, which has been a staple of its financial services regime for decades, will be allowed to continue well into the future following Brexit, which could help keep the costs and burdens of the regulation of offshore funds lower. Chances are though that the terms of the exit agreement following the Leave vote will also involve the UK retaining the equivalent of various laws which originated from the EU, to persuade the EU of the UK’s equivalence and allow the passporting of certain financial services and products from the UK into Europe to continue.
What about economic and financial sanctions?
Although EU regulation is not usually implemented in Cayman or the BVI, as both are outside the EU, one area that the UK’s
membership of the EU makes a tangible difference is in foreign policy, including economic and financial sanctions and restrictive measures. As Cayman and the BVI are subject to UK sovereignty, the UK is obliged to implement laws in both jurisdictions which give effect to the EU’s Common Foreign and Security Policy, which includes EU-origin sanctions. On Brexit, UK foreign policy will, almost certainly and over time, start to differ from the EU’s policy, including in the way it deals with countries currently subject to sanctions.
This could involve taking a stricter approach than the EU in some areas (the UK has previously been one of the main proponents for ever toughening sanctions on Russia for example) and possibly a looser approach in others, which would directly impact on the ability of Cayman and BVI funds being able to do business across (some) borders.
As a firm we haven’t taken sides, as in the end it came down to a personal decision by each UK voter last Thursday. The Leave vote is however already having a fundamental impact on UK economics and politics with worldwide repercussions looking set to continue for a long while to come, for what benefit though it’s not yet clear.
