On 28 March 2019, the Chamber of Deputies passed a law that grants investment funds a one-year delay in which to solve breaches of investment rules and EU passporting issues that would result from a “hard” or “no-deal” Brexit. The main objective of this law is to maintain market stability and protect investors from negative Brexit-related consequences.
What types of funds are concerned?
Both UCITS and SIFs are concerned, although UCITS funds will likely be most affected by investment breaches occurring as a consequence of UK leaving the EU.
What kinds of issues are anticipated?
In the case of a departure of the UK from the EU without a deal, which seems likely to happen, the UK would be considered a third country, like any other non-EU country.
This change of status would create several breaches in investment restrictions and investment policies for many UCITS and money market funds in Luxembourg. The diversification limits would be exceeded in some cases. As an example, money market funds with UK bank deposits would have to transfer those deposits to credit institutions located in the EU or in other third countries recognized as equivalent by the European Commission.
The one-year delay granted by the law will give reasonable time to Luxembourg funds to adjust their portfolio composition as well as their investment strategies and prospectuses if needed.
Brexit will also generate issues for UK UCITS managed by a UK management company using an EU passport to sell funds to retail investors in Luxembourg. In the case of a hard or no-deal Brexit, the EU passport would not be valid anymore. The law allows UK ManCos, authorized as AIFMs, to keep selling their UK UCITS in Luxembourg for a period of maximum one year, giving them additional time to get a ManCo in the EU.
What are the conditions?
The necessary adjustments of the portfolio positions, investment policies, and prospectuses must be made as soon as possible, taking into account the stability of the financial markets and the interest of the investors.
Additionally, the period of delay is granted only in relation to the breaches that result from positions taken before the Brexit date.
When does the law enter into force?
The law will enter into force starting from the date of the UK’s withdrawal from the EU.
What is being done in other EU countries?
On one side, Ireland has not granted the same flexibility to their investment funds as Luxembourg has. UK managers distributing UK investment funds in Ireland have already started transferring their funds to Irish ManCos, knowing that they will not benefit from a window in which to take the necessary actions.
On the other side, other countries including France, Germany, Italy, and the Netherlands have also modified their national laws to allow UK management companies to keep on marketing their financial products in those EU countries.
Watch our video to hear more about how regulators are preparing for a no-deal Brexit.