Introduction Amongst the current mass of speculation and hyperbole that has surrounded the recent UK vote to leave the European Union, it is important to take an initial but practical view of the Gibraltar position as it relates to financial services and, particularly asset management.

Gibraltar Funds: The National Private Placement Regime lives onIt is estimated that over 90% of Funds registered in Gibraltar operate outside of the scope of the UCITS Directive and the Alternative Investment Fund Managers Directive (AIFMD). In fact, some large Gibraltar-based funds have historically moved out of Gibraltar in order to avoid having to comply with AIFMD since it came into effect in 2013. Open ended funds that run less than EUR 100M will not be affected by Brexit and will continue to operate and be promoted through the various National Private Placement Regimes (NPPR’s) that exist in different European territories, as they have always done. Clearly this needs to be monitored. Originally AIFMD envisaged the phasing out of NPPR’s towards the end of 2018, but this was only going to happen on the basis that passporting under AIFMD would be made available for non-EU managers (so there would be no need for NPPR, and distribution could only be on the basis of AIFMD). This is now unlikely. The European Securities and Markets Authority’s (ESMA) statement on 30th July 2014 (its Opinion and Advice on the extension of the AIFMD passport) was lengthy and complex, and most commentary on the publication focused on the positive advice relating to the extension of the AIFMD passport to Alternative Investment Fund Managers (AIFM’s) established in Guernsey, Jersey and Switzerland. The reality is that by ESMA opting to follow a country by country assessment of the potential extension, the 2018 timeline has

become completely unrealistic. I say this on the basis that ESMA would be required to adopt a delegated act terminating the NPPR only when it considers that there are no significant obstacles regarding investor protection, market disruption, competition or the monitoring of systematic risk that impedes the application of the passport to the marketing of non-EU funds by EU AIFM’ in the Member States and the management or marketing of funds by non-EU AIFM’s in the Member States in line with the relevant provisions of AIFMD. Of the six countries that ESMA initially considered, positive advice was only given in relation to three, with the US, Hong Kong and Singapore being subject to further investigation and review. Guernsey, Jersey and (from January this year) Switzerland were the only countries to ‘pass’ the ESMA assessment because they are the only three counties who adopted local legislation that was substantially the same as AIFMD. ESMA still need to assess and form a view on Australia; Bahamas; Bermuda; Brazil; British Virgin Islands; Canada; Cayman Islands; Curacao, Isle of Man; Japan; Mexico; Mauritius; South Africa; South Korea; Thailand and US Virgin Islands. They have also declined to assess countries like India and China because there is no MoU between the respective supervisory authorities and ESMA (or because the current level of activity does not justify it). As such, the significant majority of Gibraltar funds are unlikely to see any change to their operations, both in terms of the way that they are managed, and the way that they can be promoted or distributed. The UK and the US will remain the key markets for fund distribution in line with other similar but more developed fund jurisdictions. The very recent ‘Brexit Information Report’ released by the States of Jersey provides an estimate of the net value of funds assets by the location of the ‘ultimate investor.’ Only 17% of this value relates to the EU while 40% relates

to the UK and 33% relates to the rest of the world. If funds choose to comply with European NPPR’s in order to promote themselves in the EU, then they will need to comply on a country by country basis where the requirements for each Member State are not streamlined or consistent. For example a depositary is required in Germany, Denmark and France where this is not a requirement in Sweden, Finland or the UK. Other jurisdictions such as Spain or Italy do not really have a local registration process and this often deters managers from marketing their funds there. However, this would have been the position pre and post Brexit so from that perspective, there is actually little change to the Gibraltar fund landscape. It is also possible for funds to consider other alternative distribution arrangements that can exist outside of the NPPR framework such as the securitisation of a funds performance through the creation of an Exchange Traded Instrument offered by a few of the member firms of the Gibraltar Stock Exchange, or the more mainstream use of UCITS platforms and management companies that are able to delegate portfolio management to entities in Gibraltar that are authorised or registered for the purpose of asset management and subject to prudential supervision. We have worked in providing both of these options to our clients.

AIFMD and Passporting of investment services: life after BrexitAIFM’s that are authorised in Gibraltar will be able to continue to rely on the imperfect AIFMD passporting system for the near future. In the eventuality of an outright exit, unless a special arrangement can be negotiated then, it is likely that passporting rights to the EU would be lost. However, special arrangements to deal with this could (theoretically) be agreed along the lines of an arrangement entered into with a Member State that grants a license in that territory, with operations being maintained largely in Gibraltar,

FUNDS IN GIBRALTAR POST-BREXIT JULY 2016

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www.gibraltarlawyers.comDisclaimer: Please note that the information and any commentary on the law contained in this practice note is only intended as a general statement and is provided for information purposes only and no action should be taken in reliance on it without specific legal advice. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequence of relying on it, is assumed by the author. Further this practice note is not intended to amount to legal advice.

Funds in Gibraltar Post-Brexit

on the basis that Gibraltar offers a similar opportunity to that Member State in order to allow regulated firms there to gain access to the United Kingdom through Gibraltar. This is an option worth exploring. The UK is the key financial centre of the EU and although access to the rest of Europe may be important, access to the UK is equally or arguably more important, and there may be opportunities for Gibraltar to position itself here. Other potential arrangements will depend on the model that is eventually adopted by the UK. The Norway model, maintaining the UK’s membership of the EEA and EFTA) would provide the least disruption to financial services being offered. If this is not the case, Gibraltar firms will need to analyse the patchwork of laws governing access by Non-EU ‘third countries’ to local markets. The recent trend in EU regulation has been to harmonise the position of third countries (in particular under AIFMD and MiFIR/MiFID II), without a requirement for the country in question to accept free movement of people. Given that Gibraltar is (along with the UK) more than simply ‘equivalent’ on the basis that firms are already required to comply with EU legislation (and not simply equivalent legislation), it is likely that any extension of the third country passport to third countries will include the UK, and by extension Gibraltar. The industry in Gibraltar is already considering a dual regime along the lines that actually already exists in other jurisdictions where there is an ability to operation on an EU equivalency basis (under regime A) but also as an alternative, under a separate and alternative regime (regime B) that could encourage new, start up, or alternative operations to move into the jurisdiction on the basis of the flexibility , speed to market and pragmatic approach that is available. This has

already (to an extent) been done within the ‘small AIFM’ regime where AIFMD grants the authority to the local regulator, the Gibraltar Financial Services Commission (FSC) to determine the requirements for that regime, and where the FSC has been able to take a view on the requirements that should apply to a small investment manager, adopting a ‘MiFID lite’ approach. That is not to say that Gibraltar will deviate from the global direction and thinking on prudential requirements that exist within EU directives and regulations but divergences in drafting, interpretation and application are likely to develop over time that ensure that international commitments are met, but without the requirement to strictly conform with EU requirements.

ConclusionThe majority of Gibraltar funds, ‘access’ has not changed and is unlikely to change in the near future on the basis that most of these funds rely on NPPR’s, and those rules are unlikely to change anytime soon. We expect funds to continue to focus on NPPR’s and/or to consider other alternative options available to them. There are likely to be options for Gibraltar investment firms moving forward that will continue to allow, in some way shape or form, access to single market either directly or on an equivalence basis. For the time being Boards may want to consider contingency options but there is no immediate need for decisions to be made on the basis of a two year transition following Article 50 being invoked (which itself may not occur for some time) To assists affected firms, ISOLAS are providing clients with pan-European advice and advising on key legal issues including leading in-house Brexit brain-storming sessions to consider options and impacts to local businesses.

GFIA hostsMiFID II SeminarThe Gibraltar Funds and Investments Association (GFIA) hosted its June training event last week. Financial Service Partner Joey Garcia spoke at the event covering the principle changes from MiFID to MiFID II with a focus on organisational requirements and the significant number of micro changes to the conduct of business rules. Notwithstanding the implementation date for the Directive having been pushed back the message from the speakers which included Heidi Bocarisa (Director of Strategy and Planning at the Gibraltar Financial Services Commission) and Lindsey Brown (of local MiFID firm GESFIN Limited) was that those firms, credit institutions or counterparties affected should be at the very least conducting their own gap analysis and seeking to understand how changes within MiFID II could affect their business models, in particular in relation to the new rules regarding inducements.Joey Garcia and Lindsay Brown have also formed part of the Gibraltar MiFID II working group chaired by Heidi Bocarisa which has been considering MiFID II over the previous 6 months or so, focusing on the derogations available within the Directive and providing recommendations as to where these may be exercised.The event was extremely well attended with around 90 guests at the seminar event hosted at the Sunborn. The event formed part of GFIA’s local training schedule which covers new and developing areas of financial regulation.Following on from the event, GFIA is proposing to create a separate gathering of members to discuss the inducements elements of MiFID II. For more information please contact

joey.garcia@isolas.gi

FUNDS IN GIBRALTAR POST-BREXIT JULY 2016

www.gibraltarlawyers.comDisclaimer: Please note that the information and any commentary on the law contained in this practice note is only intended as a general statement and is provided for information purposes only and no action should be taken in reliance on it without specific legal advice. Every reasonable effort is made to make the information and commentary accurate and up to date, but no responsibility for its accuracy and correctness, or for any consequence of relying on it, is assumed by the author. Further this practice note is not intended to amount to legal advice.

Joey Garcia