The European Commission (EC) has told UK-based asset managers they must prepare for all Brexit scenarios, with the industry facing "considerable uncertainties" as the country prepares to leave the bloc.
In a letter written by the EC's Directorate-General for Financial Stability, Financial Services and Capital Markets Union, seen by Investment Week, asset managers were told "preparing for the withdrawal is not just a matter for EU and national authorities but also for private parties".
It said: "In view of the considerable uncertainties, in particular concerning the content of a possible withdrawal agreement, stakeholders, including managers of investment funds and investors are reminded of legal repercussions which need to be considered when the United Kingdom becomes a third country."
The letter reminded asset managers that "subject to any transitional arrangement that may be contained in a possible withdrawal agreement", neither the UCITS or AIFMD directives will apply to UK firms post-Brexit.
Practically, this means when the UK leaves the EU, scheduled for 30 March 2019, UK UCITS funds and UK alternative investment funds (AIFs) will be automatically treated as third-country AIFs.
Under EU law, UCITS funds and their managers must be established and registered or authorised in the EU to manage and market funds to retail and professional investors across the bloc. Similarly, AIF managers need to be established and authorised in the EU to be allowed to manage and market AIFs to professional investors across the EU.
"This means that those UK entities will no longer be able to manage funds and market funds in the EU on the basis of their current authorisations," the letter said.
In addition to UK UCITS and AIF funds, the same implications will apply to EuVECA, EuSEF and ELTIF vehicles, as well money market funds.
The EC added: "There will be restrictions to fund-of-funds structures; in particular UCITS authorised in the EU-27 must assess the eligibility of (former) UCITS authorised in the UK.
"EU investors should review their investment criteria to assess compliance with the change in the legal status of the funds they invested into."
However, the letter noted UK firms may still access EU investors through so-called National Private Placement Regimes (NPPR), which see firms agree a deal with national regulators in order to access their markets.
EU law allows member states discretion as to whether to activate NPPR, which some do not allow for, and implement stricter rules on firms to which it applies.
Prior to Brexit, the EU had planned to "turn off" the NPPR model and replace it with the "third country passport". Since the referendum, discussion of the extension of the passport has made little progress, with experts suggesting it had become less of a priority for the EU.
However, the EC's letter said it intended to update its website with more information on the passport.