Brexit negotiations will soon create a “regulatory logjam” between the UK and Europe as firms stall on how fund passporting rules will impact their businesses, experts have argued.
Many asset managers haven’t made an impact assessment yet on how a possible change in Ucits passporting rules could work for them and how they will market funds in Europe, KPMG head of asset management regulatory change Julie Patterson says.
Most of the UK and US asset managers who distribute Ucits around Europe use Irish or Luxembourg Ucits funds but the legislation is currently not clear on how these funds will be marketed if firms lose their Mifid licence after Brexit.
Patterson says: “The immediate impact [after After article 50 was invoked] was looking at Ucits, but everything else was ‘wait and see’ [for managers]. In a number of cases, that wait and see approach didn’t even include an impact assessment. Where the assessment was done it wasn’t comprehensive enough, because it is such a complex picture.
“The key issue is once firms have decided to do something, invariably that is going to involve discussions with the regulators, and consequently they will have to change what they’re doing in the UK, and change their permissions. But the continental firms are also starting to think about what they need to do with their UK arms. Very soon what we’ll have is a regulatory logjam.”
Patterson argues that even if Article 50 is extended beyond two years, firms which need to change branches or relocate would have a limited time to start applying.
Several asset managers have already announced plans to move resources outside the UK and into Europe, including large banks such as Goldman Sachs and Morgan Stanley.
Columbia Threadneedle and rival M&G, which has already launched Sicav funds in Europe earlier this year, are currently building up their Luxembourg presence.
A Columbia Threadneedle spokeswoman says the firm is replicating some of its Oeic funds into Sicavs “where we believe there will be demand”.
She says: “Over the last few years we have focused on building out our offshore fund range – all of our recent fund launches have been in our Luxembourg Sicav (European Social Bond fund, US Disciplined Core Equities, Pan European Absolute Alpha and Lux-based UK Equity Income fund).
“In addition, we have begun the process of looking to apply to expand the scope of our Luxembourg-based management company to enable us to establish an asset management presence in the EU, if this is indeed required after the Brexit negotiations.”
A new Ucits definition?
Ucits funds are retail funds, which by definition are EU domiciled funds with EU domiciled management companies.
Patterson says after Brexit UK Ucits are no longer Ucits and therefore they wouldn’t be able to be sold to retail investors in the EU and it may follow that EU Ucits wouldn’t be able to be sold in the UK either.
Law firm Dechert partner Dick Frase says there is an ongoing question mark to what can happen to fund marketing rules.
Although it is not spelled out in the Ucits rules at the moment, Frase says all Ucits funds “can market themselves” or through appointed representatives.
However, he says: “The area with sensitivity is that currently Mifid firms in the UK have a kind of marketing passport but it is not described as such but it is generally regarded as an entitlement to promote their business in Europe.
“It remains unclear and will remain unclear for a while on what basis, such as it no longer has the Mifid passport will it be able to promote product like a Ucits and there’s the option where the firm can promote itself.”
Frase says for smaller businesses like boutique hedge funds setting up a marketing presence outside the UK will cause issues, and they might think about withdrawing from Europe.