As British voters go to the polls to say whether they want their country to leave the European Union or not, we look at a few of the issues for compliance departments.

The weight of EU regulations that applies to Britain and/or might apply to it in future is staggering. Many directives apply to the financial services industry and there is also a sweeping Data Protection Regulation (instantly applicable in all EU countries' laws without any activity needed on the part of their parliaments) in the offing. In the instance of Britain exiting or 'Brexiting' the governmental club, it is still likely that they will apply to the UK in some shape or form.

UCITS - the EU-compliant funds

Undertakings for Collective Investments in Transferable Securities, investment vehicles that follow the same rules all over the EU, underpin much of the UK's dominance of the EU's hedge fund industry. They are 'passported,' which allows managers to market them all over the EU irrespective of country of domicile. Three years ago the UK accounted for three-quarters of UCITS assets, with France coming in a poor second at 10%. Once the UK is out of the EU, funds domiciled there would cease to qualify for the 'passport.'

One problem here is that cross-border UCITS management company or 'manco' services are not designed to extend to countries outside the EU and might have to be cancelled or replaced with EU-authorised service providers in the event of Brexit.

As the law firm of Dechert has noted: "A UK manager would still be able to set up a UCITS in an EU Gateway Hub whether using a local affiliate as a ‘self-managed’ fund or by hiring a local contractor to act as the UCITS management company. The new fund could then appoint the UK manager as its delegated investment manager. According to ESMA’s UCITS V draft guidelines, the UCITS management company would need to ensure that the delegated UK investment manager was subject to remuneration policies equivalent to those in UCITS V or agree to meet them on a contractual basis."

Meanwhile, the UK's Financial Conduct Authority has been wearing its confidence in a 'remain' vote on its sleeve by proposing to amend rules and guidelines in its client assets sourcebook (CASS) and collective investment schemes sourcebook (COLL) to fit in with the latest EU pronouncements about UCITS. It has also been gold plating' the EU's UCITS rules in order to protect investors from sharp practice and it intends to keep these extra safeguards in place. It writes in its proposal: "to maintain the level of protection provided by the current handbook provisions for investors in UCITS, we propose to retain existing standards that do not duplicate or conflict with the Level 2 measures."

MiFID II still a fair bet

Beset by lack of preparation on all fronts, this year the EU changed its deadline for the implementation of the Markets in Financial Instruments directive from 3 January 2017 to 3 January 2018. The scale of the task ahead is gargantuan - the European Securities and Markets Authority has to collect data from about 300 trading venues on about 15 million financial instruments. If the UK leaves the EU, much will depend on whether the new deadline wavers as did the old. If it does not, it seems as though firms in the UK will at least be eligible to benefit from the 'MiFID passport,' allowing them to serve EU clients compliantly. Whether the EU allows them to exercise that eligibility, however, is another story. Various EU officials have made noises about spiteful retaliation if the UK leaves and a refusal of passports might be one of the forms that their anger takes.

Assuming that this hurdle does not present itself, the EU's underlying treaties give an exiting country two years to renegotiate its relationship with that body. This process, if it were to start today, would end in the summer of 2018 - well after the MiFID implementation date. The UK would, then, be part of MiFID already and its only real obstacle would be the vengefulness of the Eurocrats. Even if the EU were to withdraw its permission for 'passporting,' there are other forces at work that could drive the two jurisdictions back together over MiFID; the whole project was (at least in part) part of a plan by the 'Group of 20' industrialised nations whose purview is wider than the EU's. This body might, in future, compel the EU to 'passport' any practitioner in any 'equivalent' jurisdiction and open the door to British business again. If MiFID II has evolved into MiFID III by then, the UK might satisfy its demands solely by enacting rules that spring from the dicatates of the G20.

Alternative funds in doubt

After a vote to leave the EU, the question also arises whether HM Government would bother to repeal the AIFMD, which is at present enshrined in British legislation and not removable by Brexit alone. It is quite possible that the Govenrment would quail at the creative effort needed to replicate something along the lines of Guernsey's 'dual regime,' which makes it possible to distribute Guernsey funds into both EU and non-EU countries.

Fund managers resent the AIFMD, primarily because it is a means of regulating the managers rather than the funds themselves (although it also regulates those indirectly). They sometimes say that they expect Brexit to remove this problem, but this is rather optimistic for any British fund that is sold in the rest of the EU. The directive applies to:

• any alternative fund whose managers operate in an EU country;
• any alternative fund that is domiciled in an EU country; and
• any alternative fund that is sold in the EU.

Brexit will remove the first problem, as the fund would no longer be run from an EU country. If the fund is domiciled in Britain, the second problem would disappear. The third stipulation, however, is a major sticking-point for many funds.