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Brexit and the BVCA

The BVCA has close relationships with policy makers and a highly engaged membership covering most of the industry. This gives us a powerful voice and a unique perspective on the challenges that Brexit raises for private equity and venture capital.

Scroll down for more information on:

  • The impact the Agreement has on the private equity and venture capital industry.
  • The BVCA’s Brexit engagement with regulators, policymakers and other industries.

December 2020 saw the United Kingdom (UK) and the European Union (EU) agree on a trade deal which allows both parties to continue trading in goods free from tariffs and quotas. The EU and UK Trade and Cooperation Agreement replaces arrangements under the Withdrawal Agreement (transitional period). The UK is now out of the single market and became a “third country” under EU law on 1 January 2021. This Agreement also has implications for the UK private equity venture capital industry. UK firms no longer benefit from free movement, free provision of services and freedom of establishment and have also lost automatic right to offer services across the EU. The end of passporting means that UK firms will now have to comply with the rules of individual Member States which may differ from one another. The Agreement does not cover financial services access to EU markets, this will be determined by a separate process where the EU will either unilaterally grant equivalence to the UK and its regulated firms or leave firms to seek permission from individual Member States.


MMoU agreed on regulatory cooperation agreements

The BVCA and Invest Europe have jointly welcomed a Multilateral Memorandum of Understanding (MMoU) published by the UK Financial Conduct Authority (FCA) and European Securities Markets Authority (ESMA). The joint statement welcomed the commitment made by UK and EU competent authorities to cooperate and exchange information going forward as this is needed to ensure cross-border activities continue to operate effectively. The MMoU does not supersede applicable legislation and does not limit the use of existing mechanisms of crucial importance to our inherently cross-border industry. Invest Europe and the BVCA will continue to engage with the FCA, ESMA and other national competent authorities on the way our industry operates.

 

Joint declaration on financial services regulation

The UK and EU have published a high-level commitment to create a framework for agreeing, via an MoU by March 2021, how the EU and UK will communicate and work together on financial services regulation going forward. Both parties have also committed to discussing “how to move forward” with equivalence determinations between the EU and UK, whilst stressing the unilateral and autonomous decision-making processes of each side. We remain in discussion with HMT on the potential implications of this agreement for our industry.

 

Impact on regulatory regimes

The Alternative Investment Fund Managers Directive (AIFMD) and the Markets in Financial Instruments Directive (MiFID) are core regulatory regimes which govern and regulate Europe’s private equity and venture capital industry. The new trade deal between the UK and EU will impact firms under these regulatory regimes.

  • UK AIFMs which manage EU authorised investment funds (AIFs) will be able to continue to manage them but will lose access to the AIFMD passporting regime and the marketing passport. Any UK AIFs managed by an EU AIFM will also lose access to the marketing passport, however EU AIFs remain unaffected.

  • Third party AIFMs that want to market in the EU will need to look to EU Member State national private placement regimes (NPPRs). NPPRs are different across different Member States and some do not have a NPPR.

  • MiFID firms will have lost their passports under the new Agreement and need to revisit their arrangements.

  • In February 2019, the Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA) agreed to a Memoranda of Understanding covering cooperation and exchange of information which allows EU AIFMs to continue to delegate portfolio management to a UK investment management. See above for further detail.

The needs of UK private equity and venture capital as regards Brexit

The BVCA, in discussion with members, has identified the following as the key short term technical needs of the industry:

  • Well-functioning NPPRs in the UK and EU Member States are essential to maintaining global capital flows and must be preserved.
  • The current rules on delegation under AIFMD operate effectively and must not be made more restrictive.

The BVCA had also been in discussions with HRMC regarding firms’ Brexit planning and we have published a detailed summary of those discussions for our members. HMRC also produced a separate document summarising the outcome of meetings involving HMRC, HMT and a number of representative bodies representing the financial services industry (including the BVCA). This document contains a fuller discussion of the points identified in the BVCA example as well as other issues, not all of which may be immediately relevant to BVCA members.

We recommend that members contemplating a business restructuring (whether or not in response to EU Exit) review the BVCA example then refer to the broader HMRC document, and obtain appropriate professional advice where required.


Would current equivalence rules work for UK private equity and venture capital?

The EU does not have a single "equivalence" regime governing all aspects of financial services. For private equity and venture capital firms, the regime of most relevance is AIFMD. The third country AIFMD passport regime, as currently drafted, is not appropriate for the UK private equity and venture capital industry and we are not in favour of it being activated, as there are a number of problems with the "equivalence" concept in this regime. In addition, EuVECA does not have a third country regime.


Further detail on the inadequacies of current equivalence regimes

First, under AIFMD it is not currently possible for firms headquartered in a non-EU jurisdiction to market into the EU based on equivalence. This can only be activated by the European Commission after receiving a positive assessment from ESMA. The European Commission stated in December 2017 that third country passports “will not be granted until the right level of supervision and enforcement is in place” and that “it is not likely that we will take a decision on this soon…”. AIFMD itself would have to be amended in order to change this.

Second, it is not clear whether any UK firm would want to use the equivalence process to market AIFs across the EU or manage EU AIFs, rather than set up in the EU 27. The principal difficulty is that it would require UK AIFMs to become authorised in their EU "Member State of reference" as well as in the UK. The Member State of reference is determined according to a series of complex provisions set out in AIFMD. This structure is unattractive for two key reasons:

  • The Member State of reference rules are complicated and it is possible for disputes to arise between EU Member States as to the jurisdiction in which the UK AIFM should have obtained the relevant authorisation, or for this conclusion to be challenged by ESMA. This may entail significant delays and expense and could result in the UK AIFM being supervised by a regulator in an EU Member State other than that which it originally expected, which may cause practical difficulties and administrative complexity.
  • Once authorised, the UK AIFM would be required to comply with the requirements of AIFMD (as it forms part of continuing EU law), while also being subject to parallel UK requirements under the UK domestic version of AIFMD. Although AIFMD contains provisions which allow a third country AIFM to comply with its mandatory local law requirements if they conflict with AIFMD, the AIFM must nonetheless demonstrate that the local rule has the same regulatory purpose and offers the same level of investor protection. This may entail significant regulatory complexity, the risks of which will increase if the UK's onshore version of AIFMD diverges in the future from the continuing EU version. The regime does not, in any case, appear to be attractive for the industry because it requires full compliance with the AIFMD even if a firm is currently sub-threshold. In addition, it is unclear whether many firms would want to use it if they have already set up an EU AIFM in anticipation of Brexit.

The regime does not, in any case, appear to be attractive for the industry because it requires full compliance with the AIFMD even if a firm is currently sub-threshold. In addition, it is unclear whether many firms would want to use it if they have already set up an EU AIFM in anticipation of Brexit.

Whilst a third country passport could be more efficient than accessing EU investors through individual EU Member State NPPRs, there are several other issues with it. Our key concerns are noted below:

  • It is possible that EU Member States, or the Commission at a later date, may close their NPPRs to UK and other non-EU firms when the third country passport is activated. The drafting of the AIFMD does envisage that NPPRs could be switched off on the advice of the Commission. However, Member States can do this of their own accord and may choose to do it as soon as the third country passport is available to UK and non-EU firms.
  • There is no sub-threshold regime for smaller firms. These firms typically access EU investors via NPPRs and may need to opt-up to compliance with the full AIFMD regime or lose access completely.
  • No detail is provided on how much of a presence is required in the EU. The AIFMD states that a legal representative responsible for compliance needs to be in the EU.
  • The AIFMD is also currently being reviewed by the European Commission and further changes may be made to it in the coming years.