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Cayman fund rivals could see post-Brexit boost

| 18/07/2016 | 0 Comments

CNS Business(CNS Business): As the fallout from the Brexit vote turns to the complexities of engineering the UK’s exit from Europe, there is a real possibility that fund managers might move their headquarters from the UK to remain in the EU, and with Luxembourg and Dublin seen as viable alternatives, these fund domiciles could continue to expand at the expense of the Cayman Islands.

A recent survey by alternative fund research group Prequin found that 17% of fund managers were undecided whether they would change their location as a result of the vote, while 7% said they were considering relocating operations out of the UK. If these managers, many of which typically launch new funds in the Cayman Islands, were to set up operations in rival European jurisdictions, then the Irish or Luxembourg vehicles may well be more attractive to them than Cayman funds.

“The situation at the moment is a little unclear although we can say that there should be no immediate impact on Cayman financial services, but we will have to see how the Brexit negotiations develop to get a better picture,” said Alasdair Robertson, Global Managing Partner at Maples and Calder.

For the short term, hedge fund industry association AIMA said that uncertainty over the priorities of both those leading the UK and the EU negotiations, in terms of what outcome they plan to achieve, was just as troubling as not knowing when the formal process to leave under Article 50 of the Lisbon Treaty would be triggered.

“Until these uncertainties become resolved, it will be difficult for businesses to plan and adjust,” AIMA said in a Brexit briefing note. “One way to ‘future proof’ one’s ability to access the EU for asset managers would be to consider setting up subsidiaries or management companies as well as funds on the continent. This, however, could be a costly exercise, especially if, under certain circumstances, the UK status post-Brexit will be very close to the existing status quo.”

“The uncertainty following the leave vote over when, how and on what terms the UK will exit the EU means that all options are having to be considered by managers,” Fiona Chandler, a lawyers from Harneys in London, said in an interview.

“We are not however seeing managers looking to move elsewhere in the EU at this stage, as the legal and regulatory framework for managers has not changed following the UK vote to leave the EU and much will depend on the terms agreed for the financial services industry in the UK’s exit agreement. We would expect this to become a more real issue as and when notice under Article 50 of the Treaty on European Union is served by the UK and the two year period leading up to exit from the EU starts. Dublin would then be an obvious option.”

As far as Cayman is concerned, not being a member of the EU itself, means in theory there should not be any impact on its existing legislation or stability following the UK’s exit from the EU. Chandler said that in addition to that, there was nothing likely to change in the relationship between Cayman and the UK either.

“In terms of the relationship between Cayman and the EU it should be recalled that Cayman, as an Overseas Territory of the UK, is concurrently one of the Overseas Countries and Territory (OCT) of the European Union under the Treaty of Rome and successive EC/EU treaties,” she said. “OCT status has been recently reviewed and is now governed by the Overseas Association Decision of 2013, which provides for preferential trading rights for, in practice, less developed OCTs.”

Cayman, having the 14th highest GDP per capita in the world, has not historically looked to benefit from these rights, Chandler noted, but explained that its relationship with the EU will technically change in the future as Cayman will cease to be an OCT following Brexit.

“We do not, however, expect cessation of OCT status will materially impact on the scope or viability of the financial services industry located in the Cayman Islands,” she said.

However, Chandler believes that Britain leaving the EU could even work to the advantage of Britain and its territories.

“Brexit may end up being an opportunity for Cayman and BVI alternative investment funds and managers whose main link with the EU is through London,” she wrote in Harneys’ offshore blog.

Explaining how by no longer being part of the EU the UK could actually benefit from not being subject to the complexities of EU legislation, such as the AIFM Directive, Chandler noted that would rely on the “historically fairly generous” UK private placement regime being allowed to continue into the future, which would enable managers in the UK, as a non-EU jurisdiction, to market their funds in Europe.

Harneys said the terms of the UK’s exit agreement following the Leave vote would likely also involve the UK retaining the equivalent of various laws which originated from the EU, which would go some way 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.

Chandler told CNS Business that while the EU market is important for UK managers looking to raise capital for offshore hedge funds, managers have been quite selective in where they target investors.

“Since the financial crisis of 2007-8 and the implementation of the AIFMD in Europe, we have been seeing managers focusing on a few key EU jurisdictions when marketing their funds, rather than marketing to investors throughout the EU,” she said.

The Cayman Islands, meanwhile, is still awaiting a decision from the European Securities and Markets Association (ESMA) on its suitability for an AIFMD Passport, which had been expected at the end of June, along with other offshore centres, Bermuda and the Isle of Man. Although ESMA is not a political body within the EU, it led Harneys to ask the question, whether there was a risk that these passport decisions will get caught up in the politics of the vote to Leave and those jurisdictions pushed to the back of the queue, along with the UK.

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Category: Finance, Financial Services

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