No-deal Brexit regulations to render scheme investments illegal

James Phillips reports...

Proposed draft regulations on pension scheme investment in the event of a no-deal Brexit would see schemes breaching the law from day one.

The Department for Work and Pensions (DWP) has issued revised regulations to enter into force on 29 March 2019 if the UK leaves the European Union without a deal.

The draft Occupational and Personal Pension Schemes (Amendment etc.) (EU Exit) Regulations 2018 would require schemes to invest predominately in “UK regulated markets” rather than the current “regulated markets” more generally.

While it seems like a technical change to recognise Britain’s changed place in the world, the impact could be more significant as the way the two are defined are not analogous.

Simply, a “regulated market” is a “multilateral system operated or managed by a market operator” facilitating multiple third-party buying or selling in financial instruments.

In contrast, a “UK regulated market” must be a recognised investment exchange based in the UK, such as the London Stock Exchange or London Metal Exchange.

Hogan Lovells partner Faye Jarvis said, if the regulations are enforced, schemes would have to disinvest where they have significant investments via, for example, Dublin or Luxembourg – and many schemes do not use such recognised investment exchanges and would need to move investments.

“It’s not just that they’ve put ‘UK’ in front of ‘regulated markets’ but they’ve changed the definition as well to effectively say a ‘UK regulated market’ is a recognised investment exchange,” she said.

“Ultimately, if that stands, lots of pension schemes won’t be predominately invested in recognised investment exchanges and so, basically, the effect could be that actually pension schemes are suddenly left in a position where they would need to disinvest.”

Speed and pressure

Jarvis said it is unlikely this is the DWP’s intention, but the speed and pressure to prepare for a possible no-deal Brexit could have led to a mistake.

Nevertheless, she said no action should be taken now – particularly with negotiations not yet finalised – and predicted some breathing room may be given if such regulations came into force.

“I would not suggest that schemes on the basis should in any way start thinking about disinvesting now,” she continued. “You’d just have to accept you’d be in breach of the law.”

The DWP had not responded to a request for comment by the time of publication.