Brexit update: No deal preparations – Ireland and Italy clarify no deal laws

 

Following on from our Brexit series which focused on the updated no deal measures in the United Kingdom (“UK”) and in the European Union (‘EU”), this article focuses on the updated no deal measures in Italy and Ireland.

In light of how quickly the developments surrounding Brexit evolve, preparations for a no deal Brexit continue and many EU countries continue to update and further clarify their no deal preparation, in particular with a focus on the financial services sector.

Therefore, we continue to outline what the current status quo is in the UK and in the EU in respect of the risk of a no deal scenario.

BREXIT UPDATES: IRELAND AND ITALY CLARIFY NO DEAL LAWS

Following on from our Brexit series which focused on the updated no deal measures in the United Kingdom (“UK”) and in the European Union (‘EU”), this article focuses on the updated no deal measures in Italy and Ireland.

In light of how quickly the developments surrounding Brexit evolve, preparations for a no deal Brexit continue and many EU countries continue to update and further clarify their no deal preparation, in particular with a focus on the financial services sector.

Therefore, we continue to outline what the current status quo is in the UK and in the EU in respect of the risk of a no deal scenario.

IRELAND UPDATES NO DEAL LAW

The no deal preparations in Ireland so far have been with regard to:

  • a Memorandum of Understanding entered into between the European Securities and Markets Authority(“ESMA”) and the UK Financial Conduct Authority (“FCA”) permitting Irish management companies and Irish Market in Financial Instrument Directive (“MiFID”) firms to continue delegating to UK domiciled entities in the event of a no deal Brexit;1
  • the recognition by ESMA of certain UK central clearing counterparties (being LCH, ICE Clear Europe and LME Clear) allowing such entities to continue providing services in the EU for a period of 12 months from the date of a no deal Brexit with the intention of ensuring that there is no disruption in the central clearing of derivatives in such circumstances;and
  • the UK Central Securities Depositary Euroclear UK & Ireland (which operates CREST, the settlement system used for Irish equities listed on Euronext Dublin and the London Stock Exchange) being recognised as equivalent for a period of 24 months in the event of a no deal Brexit.

EU Commission Delegated Regulations have been put in place to allow UK counterparties to certain non-centrally cleared OTC derivative contracts to be replaced with EU counterparties, without the need to trigger a clearing obligation or collateral exchange obligation under the European Market Infrastructure Regulation (“EMIR”).

At the beginning of July, the Irish government issued a revised contingency plan (the “Plan”), and re-stated that the responsibility for implementing appropriate plans to mitigate the effects of a no deal Brexit remains with individual regulated firms.

This Plan is essentially an overview of some of the steps that funds and fund managers should have considered to ensure that they were as ready as possible for the past Brexit deadline of 31 October 2019. The below provides a summary of the key provisions under the Plan.

Assessment of investment policy:

Fund managers should have conducted an analysis of their existing portfolios to assess the implications of a no deal Brexit on their ability to implement their stated investment policy. Fund managers should have engaged with the funds’ depositary and considered updating their prospectus (and where relevant the key investor information documents) to make any necessary changes to the investment policy in order to protect the fund against any negative consequences for the portfolio manager in the event of a no deal Brexit. The main considerations to bear in mind are:

  1. a) funds gaining exposure to UK securities:if the portfolio manager was to gain exposure to the UK by relying on reference in the fund’s investment policy to investments in the EU, the fund’s investment policy should have been reviewed to ensure that such exposure is permissible after 31 October 2019; and
  2. b) UCITS and RIAIF funds:these two types of funds should also review the list of regulated markets in their prospectuses to determine whether specific reference to UK regulated markets is required.

Considerations for specific fund types:

A no deal Brexit will have implications on the ability of specific types of fund structures to implement their investment strategy as follows:

  1. a) UCITS fund of funds:UK domiciled UCITS would automatically become UK AIFs in the event of a no deal Brexit. While the Irish Central Bank has helpfully clarified that pending further consideration, it would consider UK AIFs as eligible investments for a UCITS or RIAIF, UCITS funds would have needed to ensure that, taking into account any investment in UK domiciled funds, no more than 30% of net assets were invested in all AIFs. In the case of UCITS fund of funds, this may have required a re-alignment of the investment portfolio to ensure that the fund continued to comply with this investment restriction; and
  2. b) money market funds:under the Money Market Funds Regulation(the “MMFR”), EU money market funds can only invest in deposits with credit institutions where such credit institutions have their registered office in a Member State or where a third country credit institution is subject to prudential rules considered equivalent to EU rules under the Capital Requirements Regulation. 3No equivalence decision has been made by the European Commission in this regard. 4In the absence of any such equivalence decision, EU money market funds will not be permitted to invest in the deposits of UK banks.

The Central Bank of Ireland (“CBI”) circulated a letter stating that all the above updates to a funds documents resulting from a no deal Brexit were to be submitted to it by 30 September 2019.The CBI has also reminded all boards that they are responsible for ensuring that each investment fund was to be adequately prepared for the impact of Brexit and determine if any of the above amendment to a fund’s documentation was necessary.

These updates were to be submitted to the CBI by 30 September 2019 in order to be in place for 31 October 2019.

Change of service provider arrangements:

Any UCITS fund which has appointed a UK UCITS management company would need to replace that management company in the event of a no deal Brexit. In addition, while the CBI has confirmed that an Irish QIAIF can continue to use a UK AIFM, it would need to be reclassified as non-EU AIFM under a no deal Brexit. A number of Irish QIAIFs have already taken the decision to appoint an EU domiciled AIFM so that they can rely on that AIFM to market the fund to professional clients within the EU.

In order to effect any such change of management company/AIFM, appropriate filings would have needed to be made with the CBI. It is understood that the CBI had the intention to contact all Irish domiciled AIFs and UCITS funds with a UK domiciled UCITS management company or AIFM in August 2019 to outline the relevant filing deadlines for such applications.

Separately, Irish funds should have been considering whether there were any necessary changes to be made to their distribution arrangements. If their current structure was that a UK entity would market the fund throughout Europe such access may be restricted under the local rules of individual Member States and would need to be checked.

Where an Irish Management Company or AIFM intends to appoint a UK investment manager after a no deal Brexit, that investment manager will be considered a non-EU investment manager. As a result, unless previously cleared by the CBI to act as an investment manager to Irish domiciled funds, a UK investment manager would be subject to a full review by the CBI rather than being able to take advantage of the fast-track arrangement available to EU investment managers.

Where relevant, disclosures in the fund documentation should have been updated to reflect any change of service providers to the fund.

ITALY PUBLISHES LAW ESTABLISHING ITS TEMPORARY PERMISSION REGIME AND CLARIFIES NO DEAL REGIME

As anticipated by the press release issued by the Italian Ministry of Economy and Finance published on 24 January 2019, on 20 March 2019 the Italian Council of Ministers approved a law decree laying down urgent measures to appropriately deal with a no deal scenario. As we have seen in many other no deal legislations in EU countries, the aim was to ensure financial stability and market integrity in the event of a no-deal Brexit.

The decree (Law Decree No. 22 of 25 March 2019) was published on 25 March 2019 in the Official Gazette and came into force one day later. The decree sets out the Italian Temporary Permission Regime (the “Italian TPR”), with a grace period during which UK entities can continue to operate in Italy, provided that they have given notice of their intention to the competent regulatory authority.

The Italian TPR more specifically sets out the following:

  • UK banks can continue to provide banking services for a period of eighteen months, provided that they file a notice to the Bank of Italy, at least three business days prior to the expected date of a no deal exit. Following the notice, they will only be entitled to carry on existing relationships with respect to deposit-taking activities carried out on a cross-border basis before such a date, without being able to enter into new agreements with Italian clients;
  • equally, UK banks and investment firms operating in Italy through a branch can continue to provide investment services for a period of eighteen months, provided that they file a notice to the Bank of Italy or to the Commissione Nazionale per le Società e la Borsa (“CONSOB”), depending on which is the relevant authority, at least three business days prior to the expected date of a no deal exit;
  • UK banks and investment firms operating in Italy on a cross-border basis can continue to provide investment services for a period of eighteen months provided that they file a notice to Bank of Italy or CONSOB, depending on which is the relevant authority, and that they provide such services only to MiFID-eligible counterparties, per sepublic and professional clients, and for the sole purpose of managing the life cycle of over-the-counter derivatives outstanding at a no deal date to any of the 20 Italian regions, the independent provinces of Trento and Bolzano, and local entities;
  • UK e-money institutions operating in Italy through a branch can continue to carry out such operations for a period of eighteen months, provided that they file a notice to the Bank of Italy. UK e-money institutions operating on a cross-border basis shall cease operations in Italy by the end of a shorter six months period;
  • UK payment institutions, asset management companies, investment funds and other collective undertakings, banks, investment firms providing services in Italy on a cross-border basis to retail clients, or firms that have not filed the relevant notice with the competent authorities as set out above, shall cease operations in Italy by the end of a shorter six months period, during which they will only be permitted to serve and manage existing contracts;
  • UK insurance companies operating in Italy can continue activities during a period of eighteen months however, this is limited to the maintenance of the existing insurance contracts and coverages without entering into any new contract, or renewing existing contracts. UK insurance and re-insurance distributors shall cease operations in Italy by the end of a shorter six months period; and
  • UK-regulated firms operating trading venues in Italy can continue to manage such venues and grant access to providers established in Italy on the no deal date, provided that within such a date they file the application the Bank of Italy or CONSOB, depending on which is the relevant authority, to continue the operations in compliance with the applicable European provisions.

As per Italian financial entities, the Italian TPR more specifically sets out the following:

  • Italian-regulated entities (including banks, investment firms, payment and e-money institutions, SGRs, SICAV, SICAF, managers of EuVECA, EuSEF and ELTIF funds, and financial intermediaries (under Article 106 of the Italian Banking Act)) operating in the UK can continue their activities during a period of eighteen months, provided that they file a notice with the Bank of Italy or CONSOB, whichever is the relevant authority, and comply with the applicable UK provisions; and
  • Italian-regulated firms operating trading venues in the UK can continue to manage such venues and grant access to providers established in the UK on the no deal date provided that they file the application with the Bank of Italy or CONSOB, whichever is the relevant authority, to continue the operations in compliance with the applicable UK and European provisions.

Following the publication in the Official Gazette of Law No. 41 of 20 May 2019, 5 which converted the previous decree into law, on 1 August 2019 CONSOB issued an updated Brexit Notice (the “Notice”).      6 The updated Notice did not provide new requirements to be met by regulated firms, nor did it amend the filing forms attached to the previous notice. As a consequence, notifications, applications for authorization, and notices that were already filed with CONSOB were still valid. However, regulated firms must file with CONSOB any changes and/or updates to the information and data previously disclosed, in addition to keeping their clients informed about such changes and/or updates. To ease regulated firms’ review, all changes in the updated Notice were highlighted in bold italics.

NEXT STEPS

UK entities operating in EU countries are advised to continue to follow closely the development of Brexit in the UK, and plan accordingly, depending on the EU countries their activities are based. Action is required in Ireland, where it’s urgent for firms to assess their readiness for a no deal Brexit and take necessary steps, funds boards are also required to assess the impact of Brexit in their fund documentation and communicate the outcome this assessment to the CIB.

For more information, and any guidance or advice on the impact of Brexit, Cleveland & Co, External In-House Counsel™, your specialist outsourced legal team, are here to help.

 

1For a full outline of the initiative, please see our previous newsletter:ESMA and FCA sign memorandum in case of no deal Brexit.                                                                                                                                             2For a full commentary, please see our previous newsletter:ESMA recognises three UK clearing houses in a no deal Brexit                                                                                                                                                   3Regulation EU No. 575/2013.                                                                                                                                       4 For full summary of what equivalence in the EU legislation means, please see our previous newsletter:Impact of Brexit on financial services.

 

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