Key Implications of the 2020 UK-EU Trade and Cooperation Agreement
24 December 2020, saw the United Kingdom (UK) and the European Union (EU) reach a Trade and Cooperation Agreement (the “Agreement”) in advance of the end of the Brexit transition period (11:00 p.m. GMT on 31 December 2020)
The Agreement does not provide for the provision of financial services between the UK and the EU.
What sets the scene for these services is the Joint Declaration. That document confirmed that the UK and the EU intend to agree a framework for regulatory cooperation by March 2021. The purpose of that framework will be to facilitate mutual equivalence decisions in the future . The final agreement on financial services is therefore subject to further separate negotiations.
…for a Summary and additional information on the approach of the UK regulator and the development of the UK UCITS regime ”The post-Brexit approach to regulating financial services in the UK as at Q1 2021”– see link at the end of this document
What follows is a short explanation of various fund and fund managementarrangements.
 Trade and Cooperation Agreement (including Annexes and Protocols) between the European Union and the European Atomic Energy Community, of the one part, and the United Kingdom of Great Britain and Northern Ireland, of the other part. Other related agreements and declarations made by the parties are: the Declarations; the Nuclear Cooperation Agreement; the Agreement on Security Procedures for Exchanging and Protecting Classified Information; and an Exchange of letters between the United Kingdom and the European Atomic Energy Community on provisional application of the Agreement for Cooperation on the Safe and Peaceful Uses of Nuclear Energy.
 The UK formally left the EU on 31 January 2020. Thereafter a transition period began, during which the EU and the UK negotiated the details of their new relationship. The Agreement is the culmination of those negotiations. Its purpose is to set the foundations for the legal framework between the EU and the UK. The basis of the relationship is that of two distinct but closely interlinked trading partners.
 Declarations, Joint Declaration on Financial Services Regulatory Cooperation between the European Union and the United Kingdom.
 The Joint Declaration on Financial Services Regulatory Cooperation between the European Union and the United Kingdom states that: “Both Parties will, by March 2021, agree a Memorandum of Understanding establishing the framework for this cooperation. The Parties will discuss, inter alia, how to move forward on both sides with equivalence determinations between the Union and United Kingdom, without prejudice to the unilateral and autonomous decision-making process of each side.”
Key implications of the impact of the Agreement
Very broadly speaking, an alternative investment fund (AIF) is a collective investment fund that is not a UCITS. A UCITS is an EU designation under an EU directive and is managed by an EU – Investment Manager. There may be some confusion on this point as, UK Statutory Instruments have created a “UK UCITS” regime, which we explain below. However, from an EU perspective, all UK UCITS instantly became non-EU third country Alternative Investment Funds (AIFs) at 11pm on 31 December 2020. This is because no “passport” has been switched on for non-EU AIFs (including UK funds since 1st January 2021). Sales and distribution of such funds into the EU is therefore subject to relevant member state national private placement rules. The new position is described below as the requirements of AIFMD are now applicable to “UK UCITS” in the EU context.
UK AIFM marketing a non-EU AIF in the EU
A UK AIFM is now treated as a third country AIFM by the EU and must therefore be marketed as a non-EU AIF in the EU under the national private placement of Article 42 AIFMD, where available.
UK AIFM marketing an EU AIF in the UK and in the EU
In the UK, a UK AIFM marketing an EU AIF (e.g. a Luxembourg or Irish fund) is now subject to the same requirements that apply when it markets a Cayman or other non-EU fund.
In the EU, a UK AIFM is treated as a third country AIFM by the EU member states and, consequently, may only market an EU AIF in the EU under the national private placement regime of Article 42 AIFMD, where available.
AIFMD: Management activities
UK AIFM managing a non-EU AIF
The rules applicable to a UK AIFM with respect to its activities of managing a non-EU AIF do not change.
UK AIFM managing an EU AIF
A UK AIFM may no longer use the AIFMD management passport to manage EU AIFs from the UK. It will need to determine its right to manage an EU AIF in accordance with the local requirements in the jurisdiction of the EU AIF, country by country. (For example, the Luxembourg Commission de Surveillance du Secteur Financier (CSSF) and the Central Bank of Ireland (CBI) have published guidance on the circumstances in, and the conditions subject to which, a UK AIFM may continue to manage a Luxembourg or Irish AIF, respectively.)
UK firm acting as a delegate of an EU AIFM
UK firms may continue to provide portfolio management services as a delegate of an EU AIFM in accordance with existing provisions regarding delegation to third country entities. The Multilateral Memorandum of Understanding (MMoU) agreed between the FCA and each of the EEA regulators entered into force at the end of the transition period and enables such delegation arrangements to continue.
A word of warning: the requirements applicable to the delegation of investment management activities by EU AIFMs to UK investment firms or other third country managers may change in the future as a result of the review of the AIFMD framework now commenced by the European Commission (intended to give rise to “AIFMD II”).
MiFID: Investment services and activities (including marketing)
UK firm providing investment services to EU clients; undertaking investment activities in the EU
A UK firm may no longer rely on the MiFID passport. It must assess whether the nature of the services it provides or the activities it undertakes would require licensing in the relevant EU jurisdiction. This requires taking into account a range of factors. Critical to this evaluation is an understanding of the local interpretation of the MiFID rules. The position on whether marketing constitutes a MiFID investment service or activity, for example, or restrictions on the use of tied agents, is not identical across the EU. Certain jurisdictions, as a result, may not permit the use of third country tied-agents.
Creation of a UK-specific UCITS regime
The EU UCITS framework has been on-shored into English law by the Collective Investment Schemes (Amendment etc.) (EU Exit) Regulations 201937 (as amended, “UK UCITS”), which created a separate UK regime for “UK UCITS”.
UK firm acting as a delegate of an EU Management Company of an EU UCITS
A UK firm may act as the delegated portfolio manager of an EU UCITS Management Company. No material disruption is expected with respect to these arrangements.
Again, a word of warning: this area is one that is attracting a lot of attention within the EU and may also be the subject of review.
UK firm marketing an EU UCITS
The marketing of an EU UCITS by a UK MiFID investment firm in the EU may, in some cases, be affected if such marketing is considered to be a MiFID investment activity. This will be because the UK MiFID investment firm will no longer be able to rely on any pre-Brexit MiFID passport.
UK firm managing an EU UCITS
A UK firm may no longer act as the UCITS Management Company of an EU UCITS, as the UCITS Directive does not permit a third country manager to act as the UCITS Management Company.
Status of “equivalence decisions” by the UK and EU
Equivalence decisions by the EU
Thus far the most significant EU equivalence decision relates to the 18-month time-limited equivalence decision (expires 30 June 2022) under Article 25 of EMIR, on the legal and regulatory framework of central counterparties (CCPs) that are already established and authorise in the UK. Three UK CCPs were recognised by ESMA as eligible to provide clearing services in the EU (e.g. to EU funds) but a number had their recognition removed on 1 January 2021.
Equivalence decisions by the UK
The UK has established its own equivalence framework. On 9 November 2020 a number of UK equivalence decisions for the EEA across a range of sectors under the on-shored UK regimes. Please refer to our note on equivalence.The UK equivalence decisions, combined with the FCA TTP directions (e.g., the Share Trading and the Derivatives Trading Obligation Directions) seek to allow for minimal disruption to UK firms’ normal trading activities.
The most notable UK decision relates to the equivalence of EEA regulated markets. This means that UK firms “may continue to treat derivatives traded on EEA regulated markets as exchange-traded derivatives rather than OTC derivatives.”
These decisions are in addition to the equivalence decisions taken by the EU before the end of the transition period in relation to non-EU jurisdictions, and which have been on-shored in English law from the end of the transition period.
We are delighted to discuss any issue arising out of this article and are ideally placed to help any fund or asset management businesses to understand the new regime and to help them steer a course through the implications of these complex regulations. We provide information on regulatory regimes, gap analysis and specific advice relating to individual markets to ensure that businesses’ arrangements continue as smoothly as possible.
Want to read more? For a more in depth summary of this overview which includes Passporting; FCA Guidance and Expectations, FCA TTP Direction, and more, read our summary The post-Brexit approach to regulating financial services in the UK as at Q1 2021
For any further information on this or any other funds-related topic, please contact author Verena Charvet as below.
Verena Charvet MBA,
Solicitor and Senior Partner at Merlys
Contact/Call us at Merlys | +44(0) 20 8154 6031
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This briefing note is intended to act as general guidance and is not intended to offer specific legal advice. Merlys is very happy to assist you with any aspect of the content in this article, as it relates to your business.