Regulation: What does passporting mean for the UK asset management industry?

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Since the British electorate voted to leave the EU, the City has been very focused on the need to maintain its ability to provide products and services to European clients and safeguard its position as the global hub for financial services.

In particular, media and political commentators have focused on whether, in a post-Brexit environment, UK financial firms can continue to benefit from their existing passporting rights, which give them a “one size fits all” access to EU clients and investors. But is passporting the be all and end all for asset managers? In short, no. Our focus is ensuring that fund managers continue to be able to provide services to clients across Europe, and globally, outside the EU framework. Most services provided by UK asset managers to EU clients are not provided using formal passporting arrangements in EU regulations.

Asset managers’ primary business is often provided on a cross-border basis – that is, without necessarily having to establish a branch or a presence in the country where the client is. For example, portfolio management of EU funds can be delegated to a so-called “third country” – one outside the EU – without it being a passported service.

UK firms excel at providing cross-border portfolio management services throughout the world. Just under 40 per cent of assets under management in the UK are managed for overseas clients and only around 54 per cent of this is for European clients outside of the UK. So we already operate effectively without passporting arrangements in other parts of the world. And US firms also provide portfolio management services into the EU without benefiting from a ‘passport’.

The Ucits fund passport does allow UK Ucits to be distributed to retail clients across the EU. However, only a few asset managers actively export UK-domiciled Ucits funds. The vast majority of UK managers that sell funds to European clients have EU-based fund ranges (predominantly domiciled in Dublin and Luxembourg) and delegate investment management back to the UK.

Therefore a priority is that, during the Brexit negotiation process, barriers are not erected that would prevent UK firms from continuing to provide services to clients in the EU, which is not the same as maintaining passporting rights, or remaining within the EU single market.

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This might be low-hanging fruit for the Government’s negotiation, but this is not the full picture. There remain significant political risks around the Brexit process that could disrupt asset managers. While we believe it is in both sides’ interest to ensure that UK firms can continue to act as the turntable of capital throughout Europe, providing a vital link between investors and those needing capital markets financing. We do not underestimate the risk that barriers will be erected, disrupting the cross-border provision of services.

Most significantly, the protection of market access for UK asset managers will not alone safeguard our industry. Our industry depends on the complex web of the financial cluster in the UK – where access to trading venues, brokerage services, custodian services, research, investment advice, administration and distribution, as well as access to a pool of world-class talent from throughout the globe, are critical to carrying out portfolio management. So we stand together with other parts of the financial sector that are more dependent on preserving passporting rights to continue to serve customers throughout the world.

Until we have a far clearer picture of what the relationship between the UK and the EU will look like and what type of access Britain will have to the single market, it is very hard to judge what impact Brexit will have on the industry and the UK’s financial services sector more broadly.

One thing is for certain, the UK asset management industry is in a strong position to continue to provide the wide range of products and services to clients around the world, whether inside or out of the EU.

Jorge Morley-Smith is director of business support and promotion at the Investment Association