Posted by on July 6, 2017 7:00 am
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Categories: brexit Brexit negotiations Business Economy European Securities and Markets Authority European Union European Union directives European Union law Finance Investment Ireland money Mutual fund Nationalism Systemic risk Undertakings for Collective Investment in Transferable Securities Directive

Brexit negotiations officially began three weeks ago, and whether the UK will retain access to the European Union’s single financial market once they’re over is unknown. Yet that hasn’t stopped regulators on the Continent from taking a swipe at more than a trillion euros in assets, and thousands of well-paying finance jobs required to manage them, that they think belong on the other side of the English Channel.

As Bloomberg reports, the European Securities and Markets Authority issued a ruling saying that “letterbox entities” nominally based in the European Union but managed from abroad will no longer be tolerated.

“The proposal would affect UCITS, a type of mutual fund domiciled in the European Union, that hold about 9.1 trillion euros ($10.3 trillion) of assets. The European Securities and Markets Authority said in May that passports to sell funds – effectively, a stamp of approval allowing fund managers to offer a product globally – should be rejected unless major decisions are made by management based within the bloc.”

The regulator says its Brexit-inspired guidance is intended to prevent “a race to the bottom in oversight standards,” ignoring the fact that the funds can be managed from anywhere in the world. Bloomberg neglects to specify how these funds would be treated according to existing rules: Without this guidance, would these funds be forced to re-domicile in the EU if the UK loses access to the single market? It’s unclear.

“ESMA, which could publish a second take on its opinion this week, said the guidance was prompted by Brexit as it seeks to avoid a race to the bottom in oversight standards. While almost 1.1 trillion euros of UCITS fund assets are domiciled in the U.K., according to PricewaterhouseCoopers, the implications may spread beyond the City of London. UCITS products are often domiciled in Luxembourg and Ireland, but their fund managers can be based anywhere in the world to focus on local markets.”

At least one asset manager is worried about the collateral damage to fund managers who are already based outside of the trading bloc, but choose to domicile their assets in the UK, Ireland or Luxembourg using the “passport” system.

“It could be a threat to the viability of UCITS at the global level,” Dan Waters, managing director at fund management association ICI Global, said in an interview. “There are trillions of euros, dollars, pounds of investments going back and forth right now” through the products, and there’s a chance that the regulator “could inadvertently build barriers around that.”

ESMA already warned back in May that “passports” to sell UCITS should be rejected unless major decisions are made by management based in the bloc. The agency, which does not have legislative powers, said it published the opinion to help “unify European regulators’ approach to fund registration following Britain’s vote to leave the EU.”

Though European politicians have expressed eagerness to grab slices of Britain’s financial industry since the UK voted to leave the trading bloc in June.”

Luxembourg and Ireland, two other popular destinations where UCITS funds are domiciled, could attract thousands of jobs in areas from governance to compliance if UK firms are forced to re-register within the EU because of the ESMA guidance, according to John Skelly, a Dublin-based principal at Carne Group, an adviser that helps set up UCITS funds. The guidance is also an important milestone in the Brexit process: It marks the first time that ESMA has said a certain amount of fund-management activity should be based in the EU. Though critics say the order lacks specifics about exactly what functions must be performed from within the bloc.

Some legal experts believe ESMA’s ruling is another example of an overly intrusive government. Simon Currie, a London-based partner at legal firm Morgan Lewis who advises clients on setting up operations in the EU, said “the opinion seems to overreach.”

“It’s quite clear in the directives that you can delegate decision-making in connection with portfolio management to a third country.”

If it stands, the ESMA ruling would leave UK-based firms with two choices: They could either apply to re-domicile in the EU – a process that typically takes about nine months. According to the current Brexit timetable, firms have until next June to submit those plans based on the current Brexit timetable. Fund managers could also opt to abandon UCITS and opt for the less developed passporting regimes in Asia or South America, ICI Global said.

“When ESMA releases its refined opinion, it should help show how many more people investment firms will have to employ in the EU after Brexit if they want to delegate management of the funds to an entity in the U.K., said Matt Huggett, a partner at legal firm Allen & Overy specializing in asset management.

Still, some critics say the regulators’ guidance has nothing to do with “best practices.”

“…the earlier guidance “looks like an opportunistic move to attract jobs to particular jurisdictions,” Waters said.

‘That looks to us like protectionism or regulatory nationalism.'”

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