Guidance

Venture Capital Funds (Amendment) (EU Exit) Regulations 2018; Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018; and Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018: explanatory information

Updated 8 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

The SIs are part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in the SIs would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SIs are intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instruments are still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instruments are laid before Parliament.

The Venture Capital Funds (Amendment) (EU Exit) Regulations 2018 and the Social Entrepreneurship Funds (Amendment) (EU Exit) Regulations 2018 are published alongside this explanatory information.

The Long-term Investment Funds (Amendment) (EU Exit) Regulations 2018 will be published in due course.

3. Policy background and purpose of the SIs

3.1 What does the underlying EU regulation and UK law do?

This policy note covers three SIs, which relate to the following pieces of EU legislation:

• The European venture capital funds (EuVECA) Regulation provides for a type of Alternative Investment Fund (AIF) that directs investment into small and medium-sized enterprises.

• The European social entrepreneurship funds (EuSEF) Regulation provides for a type of AIF that directs investment into social investments.

• The European long-term investment funds (ELTIF) Regulation provides for a type of Alternative Investment Fund (AIF) that directs investment into infrastructure and other long-term projects.

As EuVECAs, EuSEFs and ELTIFs are types of AIFs, their fund managers also need to comply with legislation relating to the Alternative Investment Fund Managers Directive (AIFMD), which is being onshored via the Alternative Investment Fund Management (Amendment) (EU Exit) Regulations 2018.

3.2 Deficiencies these SI remedy

Registration with the FCA

Currently, UK fund managers must register (in the case of EuVECAs or EuSEFs) or apply for authoritistion of the fund (in the case of ELTIFs), with the FCA in order to market qualifying social entrepreneurship funds, venture capital funds and long-term investment funds throughout the EU under the “EuVECA”, “EuSEF” and “ELTIF” labels. It would no longer be possible for UK fund managers to market qualifying funds under the EU regime, if the UK leaves the EU without a deal.

The UK-version of the EuVECA, EuSEF and ELTIF Regulations will only apply to UK Alternative Investment Fund Managers (AIFMs) and funds domiciled in the UK. As a result of changes made by the SIs, UK fund managers will be able to register or be authorised with the FCA in order to market qualifying social entrepreneurship funds, venture capital funds and long-term investment funds within the UK, under the “Social Entepreneurship Funds” (SEF), “Registered Venture Capital Funds” (RVECA) and “Long-term Investment Fund” (LTIF) labels respectively.

Existing UK managers of EuVECAs, EuSEFs and ELTIFs that are already registered or authorised with the FCA will be automatically transferred to the new UK regime.

Eligible investments

EU legislation currently sets out the investment rules for EuVECA, EuSEFs and ELTIFs, which can only invest in eligible assets as defined by the relevant regulations. In some cases, EEA assets are given preferential treatment over third country assets, with the EuVECA, EuSEF and ELTIF regimes making a distinction between investment in EEA member states and investments in the rest of the world. To ensure continuity for investors, this SI will maintain the existing investment rules for EuVECA, EuSEFs and ELTIFs domicilied in the UK.

Temporary marketing permissions (provided for in the Alternative Investment Fund Management (Amendment) (EU Exit) Regulations 2018)

Certain ‘small AIFMs’ (those with assets under management below the specified threshold, and meeting specified conditions) are able to market EEA AIFs that are EuVECAs and EuSEFs in the UK under the passport in the EU EuVECA and EuSEF Regulations. AIFMs are also able to market European Long-term Investment Funds (ELTIF). If the UK leaves the EU without a deal, there will be no agreed legal framework upon which the passporting system can continue. As a result, any references in UK legislation to the EEA passporting system will become deficient at the point of exit.

To ensure that UK investors have continued access to EEA funds that are currently marketed in the UK, the government announced on 20 December 2017 that it would put forward legislation to establish a ‘temporary permissions regime’. This would enable EEA funds that have notified their intention to market in the UK via a passport before exit day to continue to access the UK market for a limited period after exit day. The regime will last for three years from exit day, with a power for HM Treasury to extend the regime by no more than 12 months at a time in certain circumstances. The Alternative Investment Fund Management (Amendment) (EU Exit) Regulations 2018 sets out the design and structure of such a regime for all EEA AIFs, including EuVECAs, EuSEFs and ELTIFs.

Supervisory Cooperation

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis. Indeed, it is the UK’s firm intention to maintain a high level of mutually beneficial supervisory cooperation with EU and EEA authorities.

Transfer of Functions

Functions previously held by the Commission will be transferred to the Treasury, and functions previously held by the European Securities and Markets Authority (ESMA) will be transferred to the FCA.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA will be updating its Rulebook and relevant Binding Technical Standards reflect the changes introduced through this SI, and to address any deficiencies as a result of the UK leaving the EU. The FCA has confirmed its intention to consult on these changes in the Autumn.

3.4 Stakeholders

These SIs are relevant for fund managers operating EuVECAs, EuSEFs and ELTIFs registered in the UK.

The intention of these SIs is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury has engaged with industry bodies where possible to ensure awareness of these changes.

These SIs do not include provisions that may be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Where necessary, provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email [email protected].