The future of AIFMD and Depositary after Brexit?

The now-infamous referendum, the negotiations and Theresa May surviving a critical vote have firmly secured Brexit headlines at least until 29 March – the day the UK is due to leave the EU. With one of the world’s leading financial centres becoming no longer tied to rules and regulations created by the EU member states, what does the future hold for the AIFMD and the Depositary?

The Luxembourg financial regulator (CSSF) has recently reminded the public that a “no deal” Brexit would lead to the UK being classified as a “third country” and UK would lose its “passporting” ability to the rest of the EU. To ease the pain, a temporary permissions regime (TPR) has been effective since 7 January 2019, allowing firms and funds, who notified the UK regulator, to continue regulated business regarding the delegation of the AIFM’s portfolio management and/or risk management activities for a limited period after 29 March 2019, while seeking full FCA authorisation.

“We’ve seen some UK fund managers targeting EU investors already responding to this by moving their operations and AIFs, along with the depositaries, to other well-known EU fund-hubs, such as Luxembourg and Ireland. Others are playing the waiting game to see how the pieces will fall,” comments Robin Hoekjan, Manager Depositary Services at Intertrust Luxembourg.

The AIFMD depositary requirement was established within an EU Directive (2011/61/EU) to provide governance and safeguards. The pairing was simple: the depositary should be present in the same country as the AIF and a non-EU AIF marketing to the EU can have a depositary in a relevant third country only if certain conditions are met (AIFMD §35).

At the same time, with the UK regulatory authorities no longer tied by EU rules, we can even speculate whether the AIFMD provisions and requirements would still apply for UK AIFMs managing UK AIFs after 29 March, rendering the UK depositary unnecessary.

The HM Treasury published ‘Alternative Investment Fund Managers (Amendment) (EU Exit) Regulations 2018’ indicates a likely continued requirement for a depositary for UK AIFMs marketing to UK investors. However, the draft hasn’t become a Statutory Instrument yet. If this doesn’t happen, a transition period between UK and EU Member States to allow AIFMs to make necessary arrangements for appointing EU-based licenced depositaries could be an alternative scenario.

While uncertainty about the future requirements looms, the investors continue to appreciate the depositary for the governance and safeguards it brings. So the question should certainly not be if the depositary continues, but where it will be located.

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