More choice, lower costs

The financial services industry is optimistic that the changes announced in the Budget will help the UK become more competitive as an asset management domicile


These days, the expected outcome of any new financial regulation is to create a headache for advisers and managers alike. Yet in this year’s Budget the Government announced a number of initiatives that have been welcomed by the UK financial services industry. They are being seen as a positive step that could lead to lower fund costs and broader choice for domestic investors as well as make the UK a more competitive domicile for asset managers.

First of all there is the planned removal of stamp duty reserve tax Schedule 19 – a tax applied to UK equities, which has annoyed the industry since it was introduced in the 1990s. The headline rate of the tax is 0.5 per cent, although in funds this is generally reduced greatly. As such it has gone largely unnoticed by the end investor except perhaps in lower returns on UK equity tracker funds. However, for asset managers the cost and hassle of administering Schedule 19 has been far more burdensome.

Jorge Morley-Smith, head of tax at the IMA, says SDRT Schedule 19 has been a huge headache for the industry. Because it only applies to relevant assets, UK equities, funds have to not only keep track of which holdings within funds are liable but the calculation of the tax itself is quite complex.

Peter Grimmett, head of fund regulatory development at M&G, agrees the end of Schedule 19 is more than welcome. He says:“It is one less thing to disclose that makes the UK appear uncompetitive; it makes pricing simpler for investors to understand and can help reduce the number of errors that can occur. It is really helpful.”

Investors may eventually see the cost difference without SDRT, particularly in pure UK equity funds, but Morley-Smith says the effects would be more pronounced in the longer term. This is because the cost savings from Schedule 19 will compound up over time and groups will also benefit from the removal of the processes needed for its calculation.

Although the March Budget did not specify when Schedule 19 would end, the IMA has confirmed with the Government it will take effect from April next year, Morley-Smith says.

Stamp duty reserve tax Schedule 19 has annoyed the industry ever sincethe 1990s

Another tax initiative mentioned in the Budget impacts overseas investors as it could enable greater flexibility in bond fund distributions. Such distributions are treated as an interest payment and UK regulations currently require fund providers to withhold 20 per cent for the tax payment, even for offshore investors.

The effect of this rule has been that many global, offshore platforms dislike using UK funds as the net distribution causes administrative issues, Morley-Smith explains. As such asset management companies have been forced to either set up mirror funds offshore to enable gross distributions or have struggled to distribute their funds without some of the biggest offshore platforms, that is banks.

Grimmett says the willingness of the government to acquiesce and allow gross distributions would level the playing field for UK domiciled funds with those in say, Luxembourg. “It will lighten the burden for UK companies and for offshore investors it will be easier as a broader range of funds will all pay the same way – gross. Operationally it will also give groups less to worry about and allow us to compete more easily with offshore jurisdictions.”

Grimmett adds M&G is particularly happy with the move as it has been a big problem for UK managers.

Morley-Smith notes this is not a cost-driven initiative yet it is key to the way in which funds are distributed and how the UK as a domicile competes. Consultation on gross distributions is expected to begin next month and Morley-Smith does not expect the tax changes will take very long before becoming a reality. The affected rules are secondary legislation so once consultation is over, it can go through quite quickly, he says. “I would expect new rules next year.”

Unlike Schedule 19 the gross distributions problem may not directly impact UK investors but by making the UK more competitive as an asset management domicile, it is beneficial to the whole industry both Grimmett and Morley-Smith say. In addition, the two tax problems are not the only indications within the Budget that push forward the UK as an attractive domicile.

Grimmett points out other helpful aspects include indications of a more efficient fund approval process, one involving clear communication between the FCA and companies. At the moment the time of approval for a mainstream fund can be four to eight weeks and longer for more complex products.

He says:“The FCA is already working to reduce these times and provide us with clear information as to what is needed so we can deliver it all up front and help speed up the time to market.”

Already investors may be seeing the benefits of greater communication between bodies such as HMRC and the FCA. Morley-Smith says that following the release of the platform paper in April there was a question regarding the tax treatment of rebates for overseas investors.

Initially, he adds, it seemed as if such rebates would be taxable and yet RDR does not apply to offshore investors. Greater clarification on the issue was subsequently made that there would be no requirement to withhold tax for rebates to overseas investors.

Intentions to improve marketing about the benefits of UK as a fund domicile may also serve to draw in more fund groups and consequently widen fund choice for domestic investors. Although it could be argued the UK already has more than enough funds, new offerings from abroad may provide greater incentive in the form of new competition as well as bring in a number of good, new products.

Overall the Budget contained a number of strong and positive suggestions the asset management industry should be pleased about.

“The Government has made a very positive step forward and made a clear statement of intent of supporting the UK funds industry,” Morley-Smith says. “There is no one single thing that will make us the fund domicile of choice but all these steps will help.”


Kira Nickerson is a contributor to Fund Strategy