In the words of Donald Rumsfeld, “there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don't know we don't know.”
Although Donald’s words were used in what can be argued was a far more serious situation, his sage words can also be applied to the current regulatory space impacting cross-border distribution.
We are certain that the UK will leave the EU on 31st January 2020 – this is a ‘known known’. It has also been agreed that all interested parties will have until December 2020 to agree how the relationship between the UK and the EU27 will operate after that - this is a ‘known unknown’.
Swiss Financial Services Act
In Switzerland the ‘known known’ is that regulatory requirements have already come into effect as of 1st January 2020 and although there are guidelines to follow, the ‘known, unknown’ is just how these new requirements are going to be implemented over the two-year transition period and if and how the main distribution channels in the Swiss market are going to impose their own requirements.
Cross Border Distribution Framework
Another ‘known known’ is that in August 2021 new regulatory requirements will be introduced that will affect the cross-border registration of funds in Europe. Information regarding the revised requirements were issued in Directive 2019/1156 and Regulation 2019/1160 on 20th June 2019 - some of which came into effect immediately, adding to our list of ‘known knowns’. However, for the main changes affecting the operation of the fund in the Host jurisdiction, we await further information from each of the EU27 regulators. This is a large addition to the list of ‘known unknowns’.
The over-riding ‘known unknown’ is just how much of an impact the above changes will have on the competitive nature of cross-border registrations.
The new Swiss requirements are removing the need to translate fund documents and, eventually, the need to appoint a Swiss Representative and Paying Agent, thereby definitely helping to open up the borders to foreign funds.
The revised Cross Border Distribution Framework has removed the ability of Host regulators to insist on the appointment of a physical entity in its jurisdiction, which on the face of it will help to reduce the costs of initial and ongoing registrations. However, the need for the fund to provide facilities that allow investors in each jurisdiction to purchase and redeem shares maybe harder to fulfil than first thought without a suitably licenced entity acting in this capacity. In some jurisdictions, the need to guarantee provision of this facility may result in the appointment of a third party where one is not currently required!
The impact of the agreements that are negotiated between the UK and the EU27 are the biggest ‘known unknown’. Will they be agreed by the deadline of December 2020 and what sort of market restrictions or opportunities will they impose on UK domiciled funds wishing to access the EU27, and EU27 funds wishing to access the UK?
The above known and unknown knowns have only covered the changes that affect cross-border registrations in the EU and EEA. If we look further afield there are various known and unknowns that will affect the distribution of funds in Australia and the Americas. And this is just the A’s!
The one certainty is that the world of fund management has learned to adapt and evolve with the changing times and needs of the more global investors. What was once ‘known unknowns’ will eventually cross the border into the world of ‘known knowns’. Until then, and irrespective of how rocky the road may be, GFR will be available to offer you guidance, insight and clarity regarding the developing regulatory landscape.
Click here to speak to a specialist regarding the changes impacting your distribution strategy.