Asset managers fear delegation changes post-Brexit
Ministers, BofE and executives are worried about Paris-led efforts to tighten rules
Britain’s £8tn asset management industry is no stranger to the problems thrown up by Brexit. In common with the wider financial services sector, the industry is fretting over the loss of talent to rival financial hubs, London’s diminished appeal as a European gateway for non-EU investors and lower inward investment as foreign companies abandon or delay spending plans.
But UK-based asset managers face a particular threat — a possible overhaul to the EU’s so-called “delegation” regime that allows funds to be domiciled and regulated in another EU country, typically Dublin or Luxembourg, while being actively managed and marketed from London. Close to £1tn is managed from the UK on behalf of funds domiciled in those two EU centres, while more than a third of nearly €22tn of European client money is managed from the UK.
Government ministers, Bank of England officials and company executives are worried about Paris-led efforts to tighten delegation rules, in a move that would limit access for British-based fund managers to Dublin and Luxembourg.
Europe has already signalled the rules will be stricter. The European Securities and Markets Authority (Esma), the pan-EU financial watchdog based in Paris, warned last year that fund managers would need so-called substance — or boots on the ground — in the offices where funds were domiciled if they wanted to continue to use delegation rules.
Sean Tuffy, Citigroup’s head of market and regulatory intelligence for Emea, believes possible changes to delegation is the “number one issue” for UK and global asset managers. That’s because any EU efforts to penalise post-Brexit Britain would also be likely to hit other third-party financial centres, notably New York, which rely on EU delegation arrangements.
Changes too would be fought from within the EU by Dublin and Luxembourg, which are keen to preserve their homegrown industries.
Chris Cummings, chief executive of the Investment Association, the UK trade body, says “unpicking of delegation rules” will have reverberations. “The EU could cut itself off from UK portfolio management expertise but also from other international financial centres, from the US to Japan,” he says.
But Mr Cummings’ US counterpart, Paul Schott Stevens of the Investment Company Institute, believes that changes to the delegation rules are already under way.
“My experience with these kinds of things is when they break into public notice there has already been considerable work done behind the scenes,” Mr Schott Stevens says. “This naturally leads to concern that it is a political decision masquerading as regulatory policy.”
Not everyone believes delegation changes are afoot. One industry veteran says: “I am less worried than most although not complacent — I think it will be hard to avoid discrimination against the UK if the EU tries to limit our delegation.”
But all agree that uncertainty over Brexit is causing problems for the asset management industry, playing into the hands of rival financial centres.
“There are so many permutations [that arise because of Brexit], all of which require very different thoughts about how you might run your business and you have no clue where you will end up,” says Jamie Carter, a fund manager who heads the New City Initiative, an association for independent asset managers.