Fund Distribution from Extra-EU:
New opportunities for licensed players
As is now well known, United Kingdom left the European Union in the context of the Brexit act early 2021. One of the main implications of the new regulation is that UK companies cannot anymore approach directly EU customers while doing their fund distribution businesses, unless they establish a branch in one of EU countries.
These players in the past years were deeply used to put in place distribution/placement agreements with fund houses without take care of finding a solution to market their product in Europe. In that perspective the workflows was easier and lighter. All these companies are now facing the current reality: they lost “overnight” the ability to deal directly with European customers and in many cases, at least temporarily, also the ties with even long-standing customers.
Current situation & new requirements
In Luxembourg, they can alternatively apply to the national regime to perform investment services activities. This possibility is, however, limited to “professional per se” clients.
There are a series of UK companies that have a “placement agent agreement” in place with fund houses/management companies in order to propose fund investments to EU investors for subsequent subscription.
These UK companies can’t anymore approach EU customers directly and look for a solution allowing them to continue to make their business by respecting the MIFIDII legal provisions in force.
The Luxembourg solutions
While UK Companies have an exclusively contractual relationship with fund houses/MANCOs and do not have any relationship in place with EU professional potential investors, some licensed firms could sign an exclusively contractual relationship of “Sub-Placement agent” with this kind of UK companies without having any direct relationship with fund houses/MANCOs. In that way this European third party firms could put in place a fully regulated workflows with the original UK Company and directly exchange with EU professional potential investors:
In this perspective UK Companies could maintain their key independence within the selection of funds to be sold and the targeting of clients. They just have to deliver the official documentation regarding both the investment fund selected and the potential EU professional investors to the third party appointed as a “Sub-Placement Agent”. Both lists must be complete and accurate, and able to allow the Sub-placement agent to make the necessary AML/KYC and MIFID II checks.
On the other hand the Sub-placement agent have to take the responsibility to carry on the European activity of the counterparty ensuring first of all a proper execution of the already mentioned preliminary checks (AML/KYC and MIFID II) of the investors selected, Second, the Due Diligence of selected investment funds before the direct approach clients and ultimately ensure an effective responsiveness to the input provided by the original Placement agent.
An additional solution for these companies is to use a "Secondee" In other words, seconding one of their employees to a third European party who, while remaining employed by the original placement agent, will work and act on behalf of the sub placement agent.
The Luxembourg solution
Is it possible for that entities to find someone abroad able and professionally qualified that can help them in solving this complicated challenge?
The answer to this question is definitely positive and it is the reason why regulated asset managers based in Luxembourg are proposing themselves as a third party solution for Swiss portfolio managers that are not yet aligned with the new regulations and need to find as soon as possible the best way to respect FINMA’s restrictions. Companies as FARAD Investment Management, not only they have the necessary licenses to carry on investment activities but thanks to their strong expertise, they are able to set up a full service based on a consolidated framework made of dedicated teams able to follow the entire process from the onboarding to the day by day tasks. They can approach several reliable counterparties to work with and they have already in place a solid infrastructure in terms of procedures, know-how and communications.
Authorized PSFs like FARAD Investment Management have the necessary license, resources and structure to sign a sub placement agreement or hire a “Secondee” and carry out both of the mentioned activities.
Thanks to an internal team made of dedicated members who are following the project, the Portfolio Management and Risk Management is able to analyze technically the investment funds to propose to potential professional investors, Compliance and Legal member is in charge of AML/KYC and MIFID II checks and the Business/relationship development manager approaches the potential investors replying to each question they might have.
Conducting Officer, FARAD I.M.
Client Relationship Manager, FARAD I.M.
FARAD Investment Management S.A