Here in the UK the debate is intensifying around the EU referendum on 23 June on whether the UK should remain in or leave the EU. With not long to go to the vote, for obvious reasons a lot of the discussion about the impact of any “Leave” vote has been on the UK economy and UK citizens. Many onshore UK law firms have set out in detail the exit mechanism that would be involved following a vote to Leave and their thoughts on how it could affect the legislative landscape in the UK for financial institutions and investment managers. If the UK votes to remain in the EU, we can expect going back to business as usual in most areas, although quite how the Conservative party will re-unite itself after all the recent mud slinging remains to be seen. However, a Leave vote and subsequent Brexit from the EU could also have a much broader effect around the world, in ways that haven’t necessarily grabbed the headlines so far.
So what impact might any Brexit have on Cayman and BVI offshore funds and how they’re marketed into Europe?
One of the biggest problems with making any predictions about how any Brexit would impact anyone or anything is the sheer uncertainty surrounding the debate. No-one can know at this stage what agreement/s would be reached between a departing UK and the rest of the EU on the UK’s terms of exit, although (European Commission head) Jean-Claude Juncker’s recent comments that deserters will not be welcomed with open arms don’t make for optimistic reading. Or could the two year period after any notice to leave the EU is given by the UK come to an end without any agreement? Not impossible given the French presidential election and German federal election scheduled for 2017 - and when you realise that Canada has been negotiating its trade deal with the EU for the last 7 years and that has not yet been ratified.
Managers who excel in periods of market volatility may of course enjoy the period after any Leave vote if the IMF’s views that any Brexit would result in a protracted period of heightened uncertainty and cause volatility on financial markets prove correct.
What about financial services legislation?
For us offshore funds lawyers and your typical Cayman or BVI hedge fund, the questions of what the alternative investment funds industry and its regulation in the UK and Europe might look like after any Brexit raise some interesting questions. Historically, the UK government has been a firm supporter of the alternative investment funds industry, perhaps unsurprisingly given the importance of the UK’s financial services industry and the large number of leading hedge fund managers based in London. AIMA’s role in lobbying for the industry has also been very important, in London, Europe and worldwide. If the UK were to leave the EU, or even if it were to become a member of the EEA, the UK can be expected to lose much of its influence at the European Commission, as currently enjoyed through roles such as Lord Hill’s as commissioner overseeing financial services, and the government’s influence when lobbying on the direction to be taken with legislation affecting the financial services industry.
In terms of AIFMD, the timing of the referendum on 23 June comes neatly one week before ESMA is due to confirm its views on 30 June on whether to extend the third country passport to 6 more jurisdictions including Cayman, Bermuda and the Isle of Man. Although ESMA is not a political body within the EU and these jurisdictions are not members of the EU, given their links to the UK, is there a risk that the passport decisions could get caught up in the politics of any vote to Leave and those jurisdictions pushed to the back of the queue, along with the UK? Similarly, hand up who wants to see AIFMD 2 drafted without the input of the UK’s financial services experts…
Given these uncertainties, there are already some in Dublin who are highlighting the option for investment managers of moving over there from London to avoid the uncertainty of where any exit negotiations could leave the UK financial services industry.
Pro-Leave campaigners argue that the financial services industry could benefit from the UK no longer being subject to the complexities of EU legislation such as AIFMD. Indeed, any Brexit could represent an opportunity for those Cayman and BVI alternative investment funds and managers whose main link with the EU is through London. With a bit of luck, the historically fairly generous UK private placement regime for overseas persons, which has been a staple of its financial services regime for decades, would be allowed to continue well into the future following any Brexit, which could help keep the costs and burdens of the regulation of offshore funds lower. Chances are though that the terms of any exit agreement following a Leave vote could also involve the UK retaining the equivalent of various laws which originated from the EU, to persuade the EU of the UK’s equivalence and allow the passporting of certain financial services and products from the UK into Europe to continue.
What about economic and financial sanctions?
Whilst EU regulation is not usually implemented in Cayman or the BVI, as both are outside the EU, one area that the UK’s membership of the EU makes a tangible difference is in foreign policy, including economic and financial sanctions and restrictive measures. As Cayman and the BVI are subject to UK sovereignty, the UK is obliged to implement laws in both jurisdictions which give effect to the EU’s Common Foreign and Security Policy, which includes EU-origin sanctions. On any Brexit, UK foreign policy would, almost certainly and over time, start to differ from the EU’s policy, including in the way it deals with countries currently subject to sanctions.
This could involve taking a stricter approach than the rest of the EU in some areas (the UK has previously been one of the main proponents for ever toughening sanctions on Russia for example) and possibly a looser approach in others, which would directly impact on the ability of Cayman and BVI funds being able to do business across (some) borders.
As a firm we’re not taking sides, as in the end it will come down to a personal decision by each UK voter on 23 June. The result’s hard to predict and opinion polls remain split, so perhaps the best we can hope for is a clear decision one way or the other.