‘Delegation is not dead’, says Luxembourg regulator

Some delegation will still be allowed if there is a hard or ‘no-deal’ Brexit, the CSSF’s international affairs counsel says.

Private equity firms will not completely lose the ability to delegate management functions to a UK-based manager in the event of the UK leaving the European Union, the Luxembourg regulator has said.

Speaking at the ALFI PERE conference last week, the international affairs counsel of the Commission de Surveillance du Secteur Financier, Jean-Marc Goy, sought to allay fears that delegation would be totally restricted following Brexit.

Delegation is a key Brexit negotiation battleground between the European Securities and Markets Authority and the UK. The UK’s Financial Conduct Authority recently hit out at recommendations from ESMA to limit UK fund managers’ ability to base funds in countries where they do not have a physical presence after Brexit. FCA chief Andrew Bailey said the practice– is applied across the world with fund managers in the US and Asia running EU-based funds.

“Does it require membership of the EU to make this work? No, it does not,” said Bailey last month, adding the UK regulator was “committed to making open markets work.”

Managers had feared delegation would end as a result of a hard Brexit, but Goy said this is not the case.

Although the European Securities and Markets Authority has made clear they do not want de-facto management to happen in the UK, this doesn’t mean delegation is dead,” said Goy.

“Level one delegation is still permitted under the Alternative Investment Fund Managers Directive. This requires an objective justification for the delegation arrangement,” Goy added.

If the UK becomes a third country under AIFMD, for delegation of portfolio and risk management from a UK AIFM to an EU fund vehicle, the AIFM would have to be “authorised for the purpose of asset management” and “supervised or approved by the UK’s Financial Conduct Authority”, according to the directive. The FCA would also have to co-operate with its EU counterpart.

These terms are unlikely to change without considerable regulatory upheaval, leaving the possibility of delegation open for firms who have delegated management functions in the UK, Goy said.