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Yet another brief Brexit blog
7th February 2018
Our previous Brexit blog was in the summer of 2017, in the aftermath of Theresa May's disasterous general election (see here). At that time, our view was that both the Government and the official opposition would fudge for as long as possible any decisions on Brexit in the hope that the other party would buckle first under the weight of its own internal contradictions. Eight months on and nothing has really changed.
The EU has made it abundantly clear that post Brexit, any trade deal with the UK would exclude access to the single market for financial services. Most analysis of this appears to consider the impact to the UK based upon the current benifits of access to the single market. In our view this materially underestimates the potential damage. The EU Capital Markets Union (CMU) is scheduled to come into effect in 2019, just as the UK leaves. One of the key objectives of CMU is bringing down cross-border barriers and developing capital markets for all Member States. Ironically, it was Jonathan Hill, the former UK European Commissioner with responsiblity for Financial Stability, Financial Services and Capital Markets Union who was the driving force behind it before his resignation following the referendum.
After Lord Hill's resignation, responsibilty passed to Valdis Dombrovskis from Latvia. At the time, we were doubtful that it would maintain the same momentum without Lord Hill at the wheel. We are happy to admit that we were wrong and progress has continued. Bulgaria, which has taken over the six monthly revolving presidency from 1st January 2018 has flagged the CMU as one of its key priorities, and is indeed one of its few key priorities that is not primarily local to the Balkans.
As a part of the Alternative Investment Fund Managers Directive (AIFMD) review within CMU, the Commission is currently assessing the proportionality of AIFMD rules (for example, in relation to aligning remuneration regimes and reducing reporting burdens). An external AIFMD study (to be finalised in 2018) has been commissioned and will also cover the proportionality issue.
This external review is being conducted by KPMG and we understand that a survey should be available very shortly to be distrbuted by the Association of Real Estate Funds (AREF) and other organsiations. [UPDATE SEE HERE]
2018 will also see a review of Solvency II as part of CMU. The most immediate element of this is a review of the treatment of debt, for which an update is expected this month.
All of this means that the CMU may well deliver many of the changes the UK wanted, just as the UK is no longer able to enjoy them.
The proposed tax changes for non-residents announced in conjunction with the UK budget potentially add to the difficulties. Many UK managers had been establishing Luxembourg based management entities and funds to invest back into the UK so that they could continue to be marketed in the EU under the AIFMD passport. The uncertainty as to how such funds will be treated following the proposed budget changes (see here) and confusing Statutory Instrument published in December (see here) mean that managers have no idea how such funds will be taxed after 2019. We have clients who have put new funds on hold until the position is clearer.
Meanwhile, the Government's reponse is "The UK Investment Management Strategy II" which you can find here. This is essentially a 32 page document published in December 2017 that says that the financial services industry is very important, we will try to make sure that everything is fine post-Brexit, but we have no real idea how.