Brexit is expected to have a major impact on financial markets, both for UK-based financial services entities providing their services to EU clients and vice versa.
While the targeted date for Brexit remains scheduled for 31 October, uncertainty on the actual completion of this process still prevails. In light of this, the MFSA has outlined its position when it comes to the implications of a hard Brexit on the local asset management and asset servicing industry.
Below are eight areas which could be impacted by a hard Brexit.
1. Possible system changes for UK brokerage firms servicing Maltese clients
The provision of brokerage activities is governed by MiFID II, AIFMD and EMIR.
Any changes resulting from Brexit which may affect the provision of such services on a cross-border basis from the UK to a Maltese licensed fund or fund manager, will depend on whether the UK will be treated as an EU/EEA jurisdiction.
In the case of a hard Brexit, UK entities will lose their passporting rights.
However, if brokerage services are initiated by a Maltese fund – that is, reverse solicitation - there should be no impact on the provision of brokerage services by UK entities. Nevertheless, industry players are reminded to follow carefully any guidance issued by ESMA on the topic of reverse solicitation.
After Brexit, UK firms can provide brokerage services to Maltese clients in terms of Article 39 of MiFID II and Regulation 3 of the Investment Services Act (Provision of Investment Services and Activities by Third-Country Firms) Regulations, 2017.
2. UK UCITS and AIFs will need to offer funds in Malta under NPPR not UCITS and AIFMD directives
In the case of a hard Brexit, UK UCITS and AIFs will lose their passporting rights under the UCITS and of the AIFMD directives.
They will still be able to offer such funds in Malta under the National Private Placement (NPPR) regime, however, governed by the Investment Services Act (Alternative Investment Fund Manager) (Third Country) Regulations (Malta AIFM Third Country Regulations), and subject to the notification procedures under Article 42 of the AIFMD.
Any UK AIFMs currently passporting under Article 36 of the AIFMD will need to notify MFSA that they intend to continue marketing under Article 42, come Brexit.
3. New Maltese UCITS should seek guidance from UK FCA
Any Maltese UCITS which already passport into the UK had to follow the required FCA notification procedure by the extended deadline of 30 October 2019.
New local UCITS opting to offer their units to UK investors should seek guidance from the FCA.
4. Three options for UK-managed Maltese AIFs
Since AIFMD Article 37 has not yet come into force, Maltese AIFs managed by UK AIFMs have three options in case of a hard Brexit. They can either appoint an EU AIFM, convert to a Maltese PIF, or convert into a self-managed AIF.
Similarly, Maltese UCITS managed by a UK UCITS ManCo would have to either convert into an EU UCITS ManCo or into a self-managed UCITS.
5. Investment management delegation will remain possible
A multilateral MoU between EU/EEA securities’ regulators, including the MFSA and the FCA, has been executed, allowing certain activities to continue, including fund manager outsourcing/delegating to UK entities.
A hard Brexit should not impact the delegation of portfolio management services by UCITS management companies as long as they are requested and initiated by a Maltese client - the services would be provided by the UK entity, and therefore not carried out in Malta.
Moreover, Maltese AIFMs may still continue delegating parts of their management activities to UK firms by virtue of the MMoU and as permitted under the AIFMD.
6. UK depositories will not be allowed to perform direct depository services
UK depositories would be restricted, in the event of a Hard Brexit, from directly performing safekeeping and/or other depository services in relation to EU UCITS and AIFs, because UCITS and AIFs need to have EU depositaries in the same jurisdiction where the funds are domiciled.
UCITS and AIFs may delegate the provision of custody services to third-party custodians, therefore, allowing UK depositories to continue acting as sub-custodians.
7. Changes to UCITS asset eligibility criteria
A hard Brexit scenario may impact asset eligibility criteria in several ways, amongst them:
- Post Brexit, investment in UK UCITS cannot exceed the limit applicable to investment in non-EU countries, and, in cases of inadvertent breaches, positions should be rectified within six months. UK UCITS investments are subject to a 30% cap.
- Post Brexit, a number of counterparties to OTC derivative transactions may not meet national eligibility criteria because they are not EEA credit institutions or EEA investment firms.
However, ESMA has signed Memoranda of Understanding (MoUs) with the Bank of England (BoE) for the recognition of central counterparties (CCPs) and of central securities depositories (CSDs) established in the UK, in case of a hard Brexit scenario.
8. Business as usual for UK-managed Maltese PIFs
Maltese PIFs managed by UK firms will not be impacted by Brexit. The PIF regime is a local regime, and as long as the MFSA is satisfied that the person resident outside Malta providing investment management services to the PIF is of sufficient standing and repute, that person is exempted from requiring a licence.
A dedicated team on Brexit matters is available to answer any queries on [email protected].
PIF – Professional Investor Fund
AIF - Alternative Investment Fund
AIFM – Alternative Investment Fund Manager
AIFMD - Alternative Investment Fund Managers Directive
EU – European Union
EEA – European Economic Area
EMIR - European Market Infrastructure Regulation
FCA – Financial Conduct Authority
MiFID – Markets in Financial Instruments Directive
OTC - Over-the-counter
UCITS - Undertakings for the Collective Investment in Transferable Securities
UCITSManCo – UCITS Management Company