The United Kingdom served its Article 501 notice today, giving two years’ notice to leave the European Union. Managers of offshore funds, as well as everyone else here in the UK, now have more clarity on the Brexit timetable, with the UK scheduled to be out of the EU in March 2019. Much has been uncertain since the UK’s referendum in June last year, and that’s not likely to end until the final exit terms are agreed, but it’s clear that the effects of Brexit will be felt beyond the UK and Europe. Brexit negotiations are expected to be intense and politically complex (especially with French and German elections later in 2017 and Scotland’s demand for a further independence referendum before Brexit finally takes effect), with the UK’s stated aim, in its Article 50 notice, of agreeing a “deep and special partnership, taking in both economic and security co-operation” between the UK and EU post Brexit.
So what impact will Brexit have on offshore funds?
Although Brexit and the negotiations over the next two years aren’t expected to impact directly the laws of offshore fund jurisdictions like the Cayman Islands and British Virgin Islands, we’re keeping a close eye on any indirect effects that the Brexit process could have. The EU is in the middle of creating its ‘common EU list of problematic tax jurisdictions’ (or the EU blacklist as it’s more commonly known), which it’s expected to complete by the end of 2017, right in the middle of Brexit negotiations. Although blacklist exercises have traditionally focussed on tax co-operation and transparency, where Cayman and the BVI continue to score very highly, there’s a high political element to these exercises and the reduced influence of the UK over EU policy over the next two years increases the risk it becomes an attack on low tax rates.
Similarly, ESMA’s review of third countries for possible extension of the AIFMD passport to funds and managers from outside the EU, including in the Cayman Islands, risks slipping down the list of ESMA’s priorities over the next couple of years, while the UK’s status post Brexit is settled, including whether the UK financial services industry will enjoy any passporting rights for their products and services into the EU.
What post-Brexit plans are managers of offshore funds now making?
The UK financial services industry, including managers of offshore funds operating out of the UK, has been busy trying to figure out what it needs to do about Brexit since the referendum result in June last year, although as no-one can know what the final exit deal will be it’s been pretty difficult to pin this down so far.
After the UK government’s White Paper in early February, many have been preparing for a hard Brexit, with the UK outside the EU single market and rights to passporting round the EU from London no longer available post Brexit. Encouragingly, the UK’s Article 50 notice today proposed a “bold and ambitious” free trade agreement between the UK and EU post Brexit, including financial services, highlighting that the UK and EU regulatory frameworks and standards already match and that a key aim should be to manage the evolution of these frameworks to maintain a fair and open trading environment. Managers’ plans are now expected to start to firm up as the timing has become more certain, although they may need to stay flexible until the final terms of the UK’s exit are agreed, including any transitional arrangements to ease changes in gradually. There also remains a strong feeling that London based asset managers will find solutions that avoid having to move operations and staff out of London.
I suspect I’m not the only person in the UK who finds it hard to believe that it’s only 9 months since the referendum result and the UK’s place in Europe has already changed so much since then. We’ll be keeping a close eye on how the “new and deeper partnership” between the UK and EU evolves though in the coming months and how it may impact the offshore world.
1Under Article 50 of the Lisbon Treaty