Platforum: What might life outside the EU be like?

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It continues to be difficult to predict the impact that leaving the EU will have on UK asset management. Platforum’s recent research on fund distribution in Switzerland, a country which operates outside the EU and the European Economic Area (EEA) but is part of the Schengen agreement, gives some insights into the Swiss approach. But can this country show what to expect once Britain exits the EU?

Switzerland has a sizeable domestic retail fund market; it has a 6 per cent share of European assets under management in retail funds, excluding money market funds, fund of funds and ETFs, according to Broadridge data. This makes it the fourth largest country in Europe by assets under management, if we exclude cross-border funds.

Switzerland is famous for wealth management but the sector is fragmented. In a country with a small population of 8 million, Switzerland has more than 3,500 independent wealth managers and 586 banks. Like the UK, fund groups of all sizes, from all over the world are active in Switzerland, attracted by the high concentration of affluent and high-net-worth individuals.

Bank distribution is the dominant force. More than 80 per cent of retail funds flow through banks, while the independent wealth management sector has a much smaller share of distribution at just 13 per cent.

Interestingly, the Swiss regulator FINMA has aligned the conditions that it imposes on domestic funds with those of Ucits. However, Swiss funds do not hold passporting rights and cannot be marketed and sold in EU countries. But this approach is part of an overarching strategy to support Switzerland’s status as a country that is seen globally as having a regulatory regime with equivalence to the EU. This allows the Swiss wealth management sector to manage money from EU retail and institutional investors.

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Domicile of funds approved for distribution in Switzerland

By ensuring that its domestic regime is equivalent, Switzerland is better able to attract global asset managers who will weigh regulatory risks carefully alongside distribution opportunities when considering which markets are the most attractive.

Non-Swiss domiciled Ucits funds can be sold in Switzerland, which makes it easier and cheaper for foreign fund groups to penetrate the Swiss market. Non-Swiss domiciled Ucits funds and AIFs now account for 82 per cent of the more than 8,700 funds approved for distribution, although they only make up 44 per cent of the total fund assets.

Although Swiss fund groups dominate, the large global fund managers have made headway. BlackRock is now the fifth largest and JP Morgan the ninth largest fund manager by assets under management, according to the Swiss Funds and Asset Management Association’s (SFAMA) June 2016 data.

Swiss fund managers are hopeful that the country’s adoption of Ucits criteria for Swiss domiciled funds will help to pave the way for the introduction of passporting rights with the EU. Indeed, the European Securities and Markets Authority (Esma) issued a positive recommendation for the extension of passporting rights for Swiss Alternative Investment Funds. SFAMA continues to lobby Esma rigourously on this issue.

Using the Swiss example, demonstrating equivalence in financial regulation is an important policy for asset managers and looks to be helping to smooth the path to passporting.

We don’t yet know what parts of the single market the UK will have access to. If the UK loses the right to passport funds, the blow to many of the largest UK fund groups will be cushioned by an established presence in the main European fund markets. This is not so for smaller and mid-sized asset managers. European ambitions may only be realistic for groups with scale. The Swiss example suggests that for the UK to retain passporting rights, demonstrating regulatory equivalence would carry some weight with the EU.