UK Asset Management: Breaking free from Fortress Europe, or breaking in?
MATTHEW FEARGRIEVE discusses the relationship post- Brexit between the UK as a non-EU centre of asset management, and the sale of UK-managed investment funds into the EU.
The UK is the EU’s largest asset management centre, with around £9tn of assets under management. £2tn of those assets have been funded by investors in the EU, and UK managers naturally rely to a great degree on sales to investors in EU member states. So they and the EU have a symbiotic relationship, one which both parties take very seriously. Financial regulators in the EU are under pressure to preserve the benefits that membership bestows on members of the EU club, whilst at the same time recognising the need for EU investors to have access, via their pension funds and endowments, to the biggest possible universe of investable managers. The reformulation of the EU’s rules of entry for non-members (so called “third countries”) is therefore a matter of great concern for all stakeholders.
The regulatory backdrop here is framed between the twin pillars of European fund management: the UCITS Directives and the Alternative Investment Fund Managers Directive (AIFMD), the primary focus of which is twofold: (i) regulation of fund managers and their products; and (ii) distribution of global fund products within the EU. The paradigm is an EU fund managed by an EU manager. There are variations:
(1) EU fund managed by a non-EU (or “third country”) manager;
(2) non-EU (“third country”) fund managed by an EU manager; and
(3) a non-EU fund managed by a non-EU manager.
With the UK’s exit from the EU, it is the first and third scenarios that will apply to UK managers. And the regulatory framework is about to change, as the European Commission and the EU27 work with the UK to reshape the bloc’s flagship asset management directives in the coming years. Any curbs that the political proponents of Fortress Europe seek to impose on third country access would have serious implications for UK managers trying to sell their funds to EU customers; and, as most European financial regulators realise, such restrictions would also impede the access of EU investors to UK managers.
There are however political voices from certain EU member states- France being (predictably) the most vociferous of these- asserting that the UK’s exit from the EU presents an opportunity to expand their own share of assets under management. The ability of managers in the UK to manage funds established in the EU (for example, in Luxembourg and Ireland) on a delegation basis has become a focus for critics who believe this could allow UK managers after Brexit to access the EU on a business-as-normal basis. Regulatory experts believe delegation will be ripe for revision when the EC revisits the UCITS and AIFM Directives. That said, given the value of assets that UK managers invest for EU investors using this delegation model- around £2tn- it is likely that the EC and the EU27 will not impose a wholesale block on non-EU delegation.
In 2015, non-EU countries including Switzerland, Hong Kong, the US and the Cayman Islands were given a green light by ESMA to use the EU marketing passport, provided under the AIFMD, as a means of selling their funds into the EU. But currently these countries have still not been granted access to the EU, despite being technically equivalent in regulatory terms to EU states, and there is a growing concern that the EU marketing passport may be scrapped altogether. In this area though, as in others, market reality should come to the rescue: around £45.5bn of EU investor money is invested in UK funds. It is difficult to imagine either the UK or the EU27 being content to use the highly complex and fragmented national private placement regimes as a means of distributing these funds across Europe.
It is to be hoped that the joint market realities of the UK’s share of EU investors’ assets under management, and the need of EU pension funds to provide their investors with access to an optimized universe of investment products, will prevail. For this to transpire, EU27 financial regulators will have to resist political pressure to make Fortress Europe more difficult for UK managers to break into.
Matthew Feargrieve is an investment management consultant. You can read more of his blogs here:
