Ucits-focused fund houses appear to have made little attempt to shield themselves from a potential Brexit despite those governed by the Alternative Investment Fund Managers Directive (AIFMD) queuing up with Luxembourg and Irish regulators for fund registrations or passporting allowances.
While any Brexit negotiation could take years, a vote to exit would likely mean changes –and therefore costs – in relation to asset managers’ sales, marketing and legal structures.
However, Grant Lee, asset management partner at consultancy PwC, said movement from Ucits operators was limited.
“It is more prevalent in the AIFM sector... for non-AIFM companies and for smaller firms the activity has been limited.”
PwC had begun working with AIFMs looking at domiciling operations in Luxembourg or Dublin to ensure, if the UK does opt to leave the EU, they can “flick a switch” and continue as before.
Mr Lee added there would be a “first mover advantage” despite an exit vote likely to mean a protracted period of political negotiation before the UK officially left the trade bloc.
Figures from the Irish central bank and Luxembourg’s financial regulator showed that new asset management firm registrations in 2016 have been minimal – though registrations typically take longer than the three months that have elapsed since the referendum was announced.
Jake Green, a financial regulatory partner at legal firm Ashurst, said Ucits managers were still only in “the thought process” and were yet to submit Luxembourg applications.
“Virtually every sensible large fund manager [would] have thought about what they would do and most are thinking of doing more out of Luxembourg.
“[It will] probably just be easier to function having a [Mifid passport] in the group. Some of them already have these solutions or have these company secretarial-type offices in Luxembourg, which they can gear up over time.”
Should the UK leave the EU, one of the biggest issues would be the loss of Mifid passports, which allow firms to operate in the trade bloc.
The UK is likely to become a ‘third country’ in the event of a departure, meaning fund groups would have to negotiate agreements with individual financial regulators to operate in a particular country.
Additionally, UK-based Ucits could not be sold into the EU. Fund houses currently manage around £58bn for EU clients in such portfolios, which would be classed as alternative investment funds in an exit scenario.
Julie Patterson, director of investment management regulatory change at KPMG, said the UK’s registration as a third country could take time given EU bodies are already assessing around 10 similar applications.
This could mean asset management firms would face years of uncertainty on how to operate with EU-based clients, unless they make moves beforehand.
“Companies would have to set up some sort of business in the EU to offer services there. They can set up business in another country, but what about jobs and taxes there?
“Can they cope? Yes – if they set up companies or funds overseas. But then the UK is losing out,” she said.
IA states third-country status is not ‘desirable’
Trade body the Investment Association has stayed neutral on whether the UK should leave the EU, saying it is a matter for the electorate. Questioned by the Treasury Select Committee in January, IA interim chief executive Guy Sears did warn there could be “massive disruption” among asset management firms. He said UK-based Ucits funds would be subjected to onerous third-country distribution arrangements.
The IA has since stated: “If a UK Brexit resulted in the UK having third-country status, then it would be profoundly disruptive for the export of asset management services and products. Leaving in such circumstances, coupled with the likely loss of influence over the rules with which we would have to show equivalence to continue to operate within the EU, would not be a desirable outcome for our sector.”
Key numbers
£3bn: Earnings generated by UK fund industry from EU clients in 2014, according to the IA
£58bn: Amount of European assets held in UK-based Ucits
