Today New City Initiative is comprised of 45 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
In just under two months’ time, the UK’s membership of the EU is poised to expire. If the current political sentiment is anything to go by, the UK looks set to leave the EU without a comprehensive deal in place. While this will undoubtedly cause widespread disruption, the funds’ industry is in a less precarious position than many other sectors. Both the UK’s Financial Conduct Authority (FCA) and the European Securities and Markets Authority (ESMA) have concluded reciprocity agreements which should facilitate a degree of stability and continuity for asset managers selling investment products on both sides of the Channel.
While it is positive that UK and EU regulators have reached a short-term consensus on the status of funds distributing into each other’s jurisdictions, the durability of this arrangement is far from assured. Even though certain member states have stopped agitating for tighter controls around delegation, the issue could potentially be reignited at a later point, potentially impeding third country asset managers from accessing investors in the EU. Admittedly, the UK could obtain equivalence with the EU, but the approval process can be very protracted. Furthermore, equivalence is also a very fickle construct and can be withdrawn at short-notice by the EU, which makes financial institutions uneasy about it.
A UK funds regime
Creating a UK branded fund structure that competes with UCITS on a global scale will not be straightforward. For many, UCITS’ position is unassailable and it is rightly regarded to be the world’s best mutual fund regulatory wrapper, having accumulated net assets in excess of EUR 10 trillion, a figure which the Association of the Luxembourg Fund Industry says will reach EUR 42 trillion by 2048. That is not to say a UK fund structure cannot be delivered. The UK is home to a wide range of asset management talent, best in class service providers, a deep pool of legal and accountancy expertise, and an excellent regulatory regime. To summarise, the UK has the right infrastructure to create a funds’ regime on its own volition.
Any UK branded fund structure would need to leverage the core investor protections engrained under UCITS and AIFMD, although there is scope for relaxing or reforming some of the rules’ existing provisions. For instance, the FCA has publicly acknowledged that some of the prescriptive liquidity arrangements mandated under UCITS require updating in light of the Woodford episode. Understandably, it would be difficult for EU regulators to grant equivalence to a UK branded fund structure that is in effect competing with its very own UCITS and AIFs even if there were glaring commonalities between the two. However, this would not preclude UK funds from targeting investors in APAC, the Americas and MENA.
These markets could offer a number of commercial opportunities for UK fund managers illustrated by the fact that there are now more HNWIs living in Asia-Pacific than in North America. It is well-known that APAC industry figures are quite annoyed by the uncertainty about delegation inside the EU, having already been left aggrieved at not being awarded AIFMD passporting rights. Consequentially, the UK should forge agreements with different non-EU countries enabling their managers to structure funds in the UK and delegate portfolio management back to their home markets seamlessly. Given the UK’s reputation for excellent regulation and client protection, such products would appeal to local investors.
In addition to providing investors with greater choice, a UK fund structure could also play a pivotal role in generating employment domestically, a point that was made in an NCI paper back in 2017. Right now, a lot of fund servicing, audit and legal support is conducted in either onshore (Luxembourg, Ireland) or offshore financial centres (Cayman Islands, British Virgin Islands, etc.). If a UK fund structure acquired momentum, then more jobs could be created inside the UK. Furthermore, back office and administration roles do not necessarily need to be performed in London, evidenced by the number of service providers operating out of regional sites, namely Belfast, Glasgow, Manchester, Liverpool and Bournemouth. As a result, a UK funds regime could be an excellent opportunity to stimulate regional growth.