UK and European-wide think tank and lobbying group, The New City Initiative, has called for a “dual funds regime”, as a solution that, it believes, would remove the need for fund managers to re-structure their businesses to onshore EU locations, such as Ireland and Luxembourg, post-Brexit.
In an opinion paper published today, in which the NCI looks at the potential impact of Brexit on financial services, a dual funds regime is being touted as a potential solution to the concerns surrounding ‘passporting’ that, as reported, has been leading to some of the world’s largest financial institutions considering departing London’s financial district.
A dual funds regime – should it be successful – would bring revenues to the UK and create new opportunities across financial services, NCI said in its statement. As the true impact and outcomes of Brexit negotiations will not be known for some time, the UK government should, NCI says, be considering how it could leverage the UK’s “deep expertise in fund management to create a truly bespoke funds regime”, which would allow managers to market into both the EU and rest of the world.
Should passporting be unattainable, some sort of equivalence regime or bespoke deal must be agreed upon and a failure to achieve this could lead to major problems, such as a resurgence in regulatory fragmentation and protectionism, which, as NCI says, will “bring harm to the asset management industry and financial services sector globally”.
The NCI polled its members, in the months after Brexit to gauge their opinions on the current market predicament. Respondents were taken from the 54 independent asset management firms from the UK and across Europe, managing about £400bn and employing several thousand people.
Regulatory arbitrage between the UK and EU was cited by 54.5% of NCI members as their biggest worry; 27% identified market volatility as a paramount concern, while 18% acknowledged investor outflows/fundraising challenges was likely to be a challenge.
As a solution, the NCI believes that if the UK government sets up a dual funds regime, it would help asset managers deal with many of these – and other – worst-case scenarios. A majority of the NCI members polled (73%) agreed this was in the UK’s interests.
“A dual funds regime would help provide stability to the UK and EU asset management space,” said Jamie Carter, deputy chairman of the New City Initiative. “[It] would allow UK managers with European Union interests to continue to comply with EU laws and directives and retain favourable access to their EU investors, while simultaneously letting others market to the rest of the world ex EU, and avoid the worst excesses of EU regulation.
“Such a regime may also enable fund managers to avoid re-structuring their businesses to onshore EU locations such as Ireland and Luxembourg, provided equivalence for the UK is granted.
“Timely planning or consulting on the creation of a dual funds regime will help stem potential outflows from European investors and allay concerns among prospective investors about putting money into UK funds.”
Carter added that any eventual dual structure should also allow the UK to create its own funds regime borrowing from the best of breed regulations globally. “The importance of the UK as a European fund centre should not be underestimated,” he added.
The NCI has called on the UK government to “consult regularly” with a wide representation of industry participants to ensure diverse interests across the spectrum are recognised and on-boardednand to start setting in motion a detailed plan outlining the regulatory and tax requirements of this new dual regime, at least for the parallel UK structure. It also believes that Downing Street should have a “contingency plan in the form of setting up its own UK funds regime”, but not a parallel EU regime, should Brexit result in equivalence being denied.
The NCI believe that a dual funds regime should:
- Improve competitiveness in the UK funds market, and ensure both the UK and EU gets a good deal out of Brexit negotiations.
- Permit UK managers with EU interests to continue to comply with EU laws and directives, and retain favourable access to their EU investors.
- Simultaneously let others market to the rest of the world ex-EU, and avoid the worst excesses of EU regulation.
- Enable the UK asset management industry to maximise its European and Rest of the World coverage in this new geopolitical, economic and regulatory framework.
- Allow the UK to create its own funds regime borrowing from the best of breed regulations globally.
- Remove the need for fund managers to re-structure their businesses to onshore EU locations such as Ireland and Luxembourg (providing equivalence for the UK is granted), which would be beneficial to firms in terms of costs.
- Allow service providers such as administrators, law firms, auditors, and depositaries to thrive within the UK thereby retaining and potentially boosting employment relating to financial services.
- Simplify operational processes for managers if all of their service providers were UK-based. There is also a far larger skilled workforce in the UK than in many offshore centres, and again this would be a huge benefit.