Last year, we wrote, “The regulatory and litigation risks for private funds are greater than at any time since the financial crisis in 2008.” That statement is even more true today. The Wall Street Journal recently published separate front-page stories on an SEC initiative to oversee large private companies and the explosive growth of the private credit industry (suggesting a more active phase of regulatory oversight). Growth itself is not necessarily a risk, but disputes – and regulators – tend to follow capital.
Private funds are now an integral part of the global economy and, as a consequence, are affected by it. Currently, there are massive structural changes occurring simultaneously across industries and the economy as a whole. For example: cryptocurrencies could threaten legacy payment systems and currencies; the electrification of the auto industry may lead to obsolescence of the internal combustion engine; and climate change will increase the ESG groundswell. These changes are not merely disruptive; they are transformative.
As a result of Brexit, UK-regulated firms will already have grappled with loss of passporting and equivalence measures, and the need to navigate national regimes and relocate staff. As of today, EU firms operating in the UK have a temporary permissions regime with the UK having set out its approach to equivalence, but this remains a one-way street and the EU has made it clear that it will decide its own approach in its own time. 2021 will begin to reveal the full extent of market fragmentation and the resulting impact on liquidity. As of 2021, EU law no longer applies in the UK (save for where elements of it have been expressly incorporated into national law). We can therefore expect divergence in approaches between the EU and the UK in terms of legislation and regulation, especially as the EU’s Market Abuse Regulation (MAR) and Market in Financial Instruments Directive (MiFID II) will be updated over the next few years. Funds can therefore expect the regulatory burden to increase.