A New Relationship
with the EU:
The UK Asset
Management Roadmap
NOVEMBER 2016
FOLLOWING THE BREXIT VOTE ON 23 JUNE, THE INVESTMENT
ASSOCIATION HAS WRITTEN A SERIES OF DOCUMENTS – “BREXIT
SERIES” – OUTLINING THE POTENTIAL IMPACT ON THE ASSET
MANAGEMENT SECTOR, AND OUR POSITION ON THE BREXIT
NEGOTIATION PRIORITIES.
This paper sets out our analysis in a broader context that examines how best to ensure
that the UK can retain a thriving asset management sector able successfully to serve
both domestic and international clients.
In this paper, the consideration of the impact of Brexit on the investment management
sector includes text and analyses also contained in other IA Brexit Series Papers,
including papers prepared in association with Macfarlanes LLP (www.macfarlanes.com)
and Simmons & Simmons (http://www.simmons-simmons.com/).
CONTACT:
JORGE MORLEY-SMITH
DIRECTOR, THE INVESTMENT ASSOCIATION
••••••••••••••••••••••••••••••••
E [email protected]
The Investment Association
Camomile Court, 23 Camomile Street
London, EC3A 7LL, UK
T +44 20 7831 0898
W theinvestmentassociation.org
www.theinvestmentassociation.org
@InvAssoc
November 2016
© The Investment Association (2016). All rights reserved.
No reproduction without permission of The Investment Association.
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
CONTENTS
Foreword2
Executive Summary3
1
2
An Asset to the UK
5
A European and Global Success Story
9
3
Brexit Recommendations
12
ANNEX: Case Studies
16
Glossary27
1
THE INVESTMENT ASSOCIATION | BREXIT SERIES
FOREWORD
THE UK HAS VOTED TO LEAVE THE EUROPEAN
UNION. THE MOMENTOUS REFERENDUM OF
23 JUNE 2016 WILL BE REMEMBERED AS A
SIGNIFICANT EVENT IN THE HISTORY OF THE
UK AND IT LOOKS SET TO TRANSFORM THE
WAY IN WHICH WE AND FUTURE GENERATIONS
CONDUCT OUR POLITICS AND DO BUSINESS.
PRIME MINISTER THERESA MAY AND HER
GOVERNMENT HAVE MADE CLEAR THEIR
DETERMINATION TO MAKE A SUCCESS OF
BREXIT. WE SHARE THAT GOAL AND WE
WANT THE UK TO CONTINUE TO DEVELOP AS
THE BEST PLACE IN THE WORLD FROM WHICH ASSET MANAGEMENT FIRMS
SERVE THEIR CLIENTS, BOTH DOMESTIC AND OVERSEAS.
Asset management sits at the heart of the economy, helping millions of individuals and
households to save for the long term and investing billions of pounds to support companies,
Government and projects in need of finance. A successful industry does not just serve its
domestic customer base, but exports products and expertise internationally, providing an
additional economic contribution in the form of export earnings, tax paid and jobs created.
The UK is, by a significant margin, Europe’s most successful asset management centre and the
second largest in the world. Asset management firms manage £5.7trn from the UK, of which some
£1.2trn is for EU investors and a further £1trn is for clients across the rest of the world.
Reconfiguring the relationship between the UK and the EU, and the regulatory environment in
which UK asset managers operate, will affect the way clients access investment services and
businesses raise capital throughout the EU. This also affects the role of the UK as an international
centre for financial services.
This roadmap looks at the options available to the UK Government in negotiating Brexit, and the
position of the asset management sector in the context of those negotiations. Some elements of
this roadmap are necessarily technical. This can’t be avoided. Brexit will be a complex task with
decades of EU law and regulation needing to be replicated, unravelled or replaced.
Our priorities are based on three basic objectives, shared across the financial services sector.
First, that the UK successfully negotiates at a technical level with the EU and its Member States
to ensure that UK businesses can continue to offer products and services to EU clients. Second,
that the UK remains an attractive wider international centre for inward investment and location
of financial services entities. Third, that UK firms continue to be able to successfully serve savers
and investors as well as companies and other projects in need of finance.
We firmly believe that a Brexit deal which delivers for investment management will deliver for the
whole economy.
CHRIS CUMMINGS
CHIEF EXECUTIVE OFFICER, THE INVESTMENT ASSOCIATION
2
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
EXECUTIVE SUMMARY
THIS PAPER EXAMINES THE SPECIFIC IMPLICATIONS OF BREXIT ON THE
PROVISION OF INVESTMENT MANAGEMENT SERVICES TO CLIENTS IN THE EU
AND CONSIDERS THE BROADER ROLE OF THE INDUSTRY IN THIS CONTEXT.
SECTION ONE SETS OUT THE ROLE OF THE UK ASSET MANAGEMENT IN THE
DOMESTIC ECONOMY.
l Every day millions of households, pension funds, insurers, and other investors from across
the world entrust UK-based investment firms to put their money to work in global markets,
helping to deliver long-term returns.
l This money provides the funding for companies to grow, and housing and infrastructure to be
built. The capital investment managers deploy is the lifeblood of the economy.
l The investment management sector distributes the fruits of growth, from income or capital
appreciation, to savers and investors. This flow of savings and returns forms a virtuous circle.
Firms also provide a variety of diversification, asset allocation and risk management services
both to retail savers and institutions.
l As part of that process, the UK asset management industry is a critical part of the capital
markets at the heart of the UK financial services cluster.
SECTION TWO LOOKS AT THE EUROPEAN AND WIDER INTERNATIONAL
SIGNIFICANCE OF THE INDUSTRY.
l The UK is home to one of the largest and most successful investment hubs in the world. IA
members manage £5.7tn of assets on behalf of investors throughout the world, of which £1.2
trillion is for European investors and £1trn for other international investors.
l This is the second largest investment industry after the US, and larger than the next three
largest in the EU (Germany, France and Italy) combined.
l The asset management industry has developed a talent pool in the UK with a particular,
highly sought after skill set which has been marketed internationally. The industry
contributes some £6bn to the UK economic balance sheet through export earnings.
l UK asset managers serve the EU market using both passports and extensive delegation.
These mechanisms allows billions of pounds to be managed from the UK for overseas
domiciled and distributed funds and other clients, such as pension funds and insurance
companies.
l Governments throughout the world, and particularly in Europe, are seeking to boost pensions
savings in response to demographic changes, and to develop alternatives to bank-based
financing for companies and infrastructure. UK industry expertise provides the basis for new
international growth in response to these trends.
l The industry’s strengths have been recognised by the successive UK governments and
the Financial Services Trade and Investment Board (FSTIB) has been a welcome source of
support.
3
THE INVESTMENT ASSOCIATION | BREXIT SERIES
SECTION THREE SETS OUT OUR PRIORITIES FOR A POST-BREXIT SETTLEMENT.
SECURING THE RIGHT FUTURE TRADING CONDITIONS FOR THE UK ASSET
MANAGEMENT INDUSTRY FROM BREXIT NEGOTIATIONS WOULD NOT ONLY PRESERVE
CURRENT INVESTMENT MANAGEMENT ACTIVITY WITH THE EU BUT OFFER THE
POTENTIAL TO EXPAND TRADE WITHIN THE EU AND THE REST OF THE WORLD AND
BOOST THE ROLE OF THE INDUSTRY DOMESTICALLY.
We have identified eight objectives to enable the investment management sector to make a
success of Brexit. These are (in no order of priority):
1
Recommendation 1 - Both EU and UK investors delegate management of their portfolios
to UK investment managers either directly or by investing in funds set up in the UK or
other EU countries and which are managed in the UK. These investors include individual
retail investors, institutional investors such as pension funds or insurers and corporates in
both the EU and UK. In order to preserve the ability to serve this broad client base through
delegation, the FCA should enter into the relevant cooperation agreements with regulators
throughout EU Member States immediately on Brexit to ensure these delegations can
continue without interruption.
2
Recommendation 2 - The UK Government should seek long term mutual recognition of
the regulatory regimes in the UK and the EU, through the institutionalisation of regulatory
cooperation which recognises the benefits of regulatory harmonisation across Europe and
the rest of the world. This requires a pro-active and responsive approach by UK regulators
and goes beyond bilateral agreements and MOUs. We would urge early consideration of the
implications for FCA activity, including resources.
3
Recommendation 3 - If the UK leaves the Single Market, UK Firms providing services to
EU-based institutional clients outside of the Single Market will find differing rules across
EU Member States, including some local rules permitting cross border services. The UK
should seek clarification from EU Member State regulators and an agreement to provide
certainty to UK firms providing cross border services, and cross border distribution.
4
Recommendation 4 - Recognising the limitations of the existing EU equivalence
framework for a future relationship with the UK, the UK Government should seek as an
interim transitional measure pending full mutual recognition, a roadmap for access to the
MiFID third country passport (including obtaining an equivalence assessment from the
Commission) to be implemented immediately on Brexit.
5
6
7
8
Recommendation 5 - The UK should negotiate maintaining UCITS status for UK qualifying
funds and mancos, or at minimum to provide grandfathering for existing UK UCITS and
UCITS mancos. Likewise the UK should ensure that those EU27 UCITS and AIFs which are
marketed into the UK can continue to be held and bought by UK investors.
Recommendation 6 - The UK Government should safeguard access to market
infrastructure in the UK, avoiding fragmentation of the UK’s cluster.
Recommendation 7 - The Government must give consideration to the availability of skilled
workers. This does not pre-suppose a specific industry position on free movement, but
requests appropriate mechanisms to meet the needs of industry.
Recommendation 8 - The Government should consider and seek to enhance the wide
range of factors which enable the UK to compete as an international financial services
centre.
4
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
1 AN ASSET TO THE UK
ASSET MANAGEMENT IS A THRIVING INTERNATIONAL INDUSTRY WHICH
BRINGS REAL BENEFITS TO THE UK DOMESTIC ECONOMY. THIS IS ABOUT
MUCH MORE THAN EXPORT CONTRIBUTION: THE INVESTMENT MANAGEMENT
INDUSTRY IS A CRUCIAL ‘TURNTABLE OF CAPITAL’, GATHERING
TOGETHER THE SAVINGS OF MILLIONS OF INDIVIDUALS AND USING
THEM COLLECTIVELY TO PROVIDE LONG-TERM FINANCE FOR BUSINESS,
GOVERNMENT, AND MAJOR PROJECTS.
FUNDING BUSINESS AND GOVERNMENT
Every day millions of households, pension funds, insurers, and other investors from across the
world entrust UK-based investment firms to put their money to work in global markets, helping to
deliver long-term returns. This money - some £5.7trn in total - provides the funding for companies
to grow, and housing and infrastructure to be built. The capital investment managers deploy is
the lifeblood of the economy. They buy shares and corporate bonds, provide investment in smalland medium-sized enterprise (SME) private equity, and fund infrastructure and housing. Asset
managers also purchase large amounts of government debt, both from the UK and around the
world, facilitating public sector investment.
Recent analysis by independent consultant Oxera quantifies this role in more detail, showing how
long-term relationships with companies facilitate this support.1 In practise this translates into:
l Tens of billions of pounds invested each year to support companies issuing both equity and
debt, with 60% of new capital market funding coming from asset managers.
l Funding for infrastructure and housing, with the majority of new social housing now funded
via asset managers.
l Increasingly diverse forms of funding, including direct lending where some asset managers
interact directly to finance companies.
Providing funding to companies in difficulty during financial crisis
ASSET
MANAGEMENT
IN
ACTION
During the worse phase of the global financial crisis in 2008-09, asset
managers contributed to the £80bn in rights issues and placings by
UK firms as a number of companies struggled with debt levels. These
ranged widely from travel and leisure firms such as National Express
to industrials such as Cookson.
Greater role in market-based finance
In December 2013, six insurance companies with investment
management arms agreed to provide £25bn for UK infrastructure. In
December 2014, six firms made a commitment to invest around £9bn
in UK private placements and other direct lending to UK companies.
1
For more information, see Oxera, The contribution of asset management to the UK economy (2016)
5
THE INVESTMENT ASSOCIATION | BREXIT SERIES
PROVIDING RETURNS TO MILLIONS OF SAVERS AND INVESTORS
Through its activity in the capital markets, the sector distributes the fruits of growth, from
income or capital appreciation, to savers and investors. This flow of savings and returns forms
a virtuous circle. The industry simultaneously serves millions of households who have invested
through pensions, insurance, ISAs or directly into funds, while funding the broader economy. By
pooling money and investing through collective mechanisms, asset managers deliver significant
economies of scale and diversification.
BANKS
INSURANCE COMPANIES & PENSION FUNDS
ASSET
MANAGEMENT
COMPANIES
USERS OF FUNDS
PROVIDERS OF FUNDS
HOUSEHOLDS
CORPORATES
GOVERNMENTS
REST OF WORLD
Asset managers
distribute the fruits
of growth to savers
and investors
CAPITAL
MARKETS
HOUSEHOLDS
CORPORATES
GOVERNMENTS
REST OF WORLD
INVESTMENT BANKS & BROKERAGE FIRMS
In recent years, the sophistication with which industry can serve specific client groups has
advanced significantly. Beyond core services such as diversification within and across asset
classes, it offers approaches to meeting client needs that are highly tailored, such as Liability
Driven Investment for defined benefit pension schemes. The industry’s ability to deliver such
services is in turn part dependent upon its ability to access advanced capital markets.
6
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
SUPPORTING DOMESTIC POLICY
The asset management industry is a highly engaged delivery partner to the UK Government
as it advances its domestic agenda. This can be seen in three key areas:
l Exercising economic stewardship - Productive, diversified investment depends
ultimately on our ability as allocators of capital to work as stewards of UK companies,
encouraging them to plan and invest for the future in a way that can help to contribute
to long-term growth across the economy. Our Productivity Action Plan is a very
tangible reflection of our commitment to look again at the nature of that dialogue and
look at how asset managers, firms, government and regulators can work together to
support the role of market finance in funding real economic growth through long-term
investment. This again has implications for a future role in the CMU project and the
greater use of market-based finance to drive growth within the euro-zone.
l Pension reforms - As the ongoing shift away from defined benefit (DB) to defined
contribution (DC) pensions continues, the visibility of investment managers will
increase comensurately. This is particularly the case given the accompanying
‘Freedom and Choice’ reforms affecting retirement income. The industry will work with
government to ensure that its services are provided in the most transparent manner,
remain competitive and focused on delivering the best possible outcomes to UK
individuals and households. This will also involve an increasing focus on how DC savers
can access diverse and sustainable investment returns beyond traditional asset
classes such as equities, corporate and government bonds.
l Transformation of retail market - The UK pension reforms cannot be seen in isolation
from the retail savings and investment market, given the greater responsibility now
falling upon individuals for a variety of life events, from higher education to pensions.
Again, asset managers play a critical role and recognise the need to do more to build
the trust and confidence necessary for productive diversified long-term investment to
be more attractive than bank/building society accounts or residential property.
A VITAL PART OF THE UK CAPITAL MARKETS
The investment management industry is concerned to ensure that, as government enters
negotiations with EU partners, it considers financial services through the wider lens of the
financial services cluster. The cluster is further underpinned by major support activity in areas of
UK comparative specialisation, like law and tax, professional services which in turn contribute to
international export earnings.
The interaction between investment managers as the ‘buy side’ and investment banks
representing the ‘sell side’, alongside other participants and facilitators, is a defining feature of
the UK’s capital market structure. It is also a critical element within the UK financial services
cluster.
7
THE INVESTMENT ASSOCIATION | BREXIT SERIES
The position of the UK’s capital markets is supported by the critical mass of investment firms
and investors either located in the UK or accessible from the UK. This sustains deep pools of
liquidity and ensures efficient and well-functioning capital raising and trading activity across
all asset classes. Moreover, UK and European capital markets and market infrastructure are
highly interconnected. While the UK is the predominant location for trading venues and related
infrastructure, their ability to operate across Europe under a wide range of EU regulations
including MiFID and EMIR has enabled the development of critical mass in the UK in different
products and markets, created economies of scale and possibly lowered the cost of a number of
services.
The objective
should be a
confident,
innovative,
international group
of investment
managers able
both to import and
export expertise to
the benefit of the
UK economy
INTERNATIONAL RELEVANCE
As explored further in the next section, features of the UK domestic savings landscape are
common across Europe and many parts of the globe: populations are ageing and placing greater
strain on public finances and there is an increased need to encourage take-up of pensions and
long-term savings. At the same time, government fiscal policy and the global banking crisis have
increased the need to provide market-based sources of finance.
Ultimately, UK policy goals will be facilitated by an industry that is not purely domesticallyfocused. Instead, the objective should be a confident, innovative, international group of
investment managers able both to import and export expertise to the benefit of the UK economy,
whether through export earnings, capital allocation in the UK or services to UK savers.
8
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
2 A EUROPEAN AND
GLOBAL SUCCESS STORY
THE UK HAS THE LARGEST ASSET MANAGEMENT INDUSTRY IN EUROPE
AND THE SECOND LARGEST IN THE WORLD. IT HAS BENEFITED FROM A
NUMBER OF FACTORS THAT HAVE MADE IT THE LOCATION OF CHOICE FOR
INTERNATIONAL FIRMS, INCLUDING A GLOBALLY CONVENIENT TIME ZONE,
LANGUAGE, THE STRENGTHS OF THE UK’S LEGAL STRUCTURE, AND A
HIGHLY SKILLED AND MOTIVATED WORKFORCE. THE UK ASSET MANAGEMENT
INDUSTRY HAS ALSO BENEFITED FROM, AND CONTRIBUTED TO, LONDON’S
ROLE AS A GLOBAL CITY.
THE LARGEST ASSET MANAGEMENT CENTRE IN EUROPE
Of the £5.7trn managed by IA members in the UK, we estimate that some £2.2trn (around 40%) is
managed for overseas clients. Just over £1.2trn is accounted for by EU clients and £1trn from the
rest of the world.
The UK dominates the asset management industry within Europe with a market share of assets
under management of 37% in 2013 (latest available data) - more than the total amount managed
in the next three largest European countries. UK assets under management account for 320% of
UK GDP – against an average in Europe of 114%.
The broader international importance of the UK as an asset management centre is underscored
by the nature of the firms operating from this country. Almost 60% of all assets managed from
the UK are accounted for by overseas headquartered firms.
A MAJOR EXPORT SUCCESS STORY
The success of the UK asset management industry has allowed it to develop skill sets that have
been marketed internationally, and helped to facilitate a more direct contribution to the UK
economic balance sheet, through significant export earnings derived from services provided to
clients in the EU and the rest of the world. The industry contributes some £6bn annually to the UK
economic balance sheet.
Governments throughout the world are seeking to boost pensions savings in response to
demographic changes, and to develop alternatives to bank-based financing for companies and
infrastructure. The UK’s expertise in investment management presents an opportunity for further
growth internationally in response to these trends.
Because of its inherent and historical strengths, the UK asset management industry is uniquely
placed to benefit from global trends, and has capacity to provide services to clients across
the globe. Retaining this capacity, and growing the asset management industry in new and
developing markets will be a priority after the UK has left the EU.
9
Asset managers
contribute £6bn
to export earnings
annually
THE INVESTMENT ASSOCIATION | BREXIT SERIES
HOW WE EXPORT ACROSS THE EU
Industry operating structures and the regulatory framework that govern it are set out in the Annex
to this paper. While they are inevitably complex in practice, they rest on a fairly small number of
basic operational tenets:
Delegation. This means that a third party has been engaged to carry out certain tasks on behalf
of the principal. For this paper we refer specifically to the delegation of portfolio management
services, which is a common practise in the UK’s provision of services across the EU.
For example, an investment fund that is legally resident in Luxembourg or Dublin and
distributed across the EU (or indeed internationally) could choose to manage the portfolio of
assets elsewhere. The UK is a destination of choice for that portfolio management. However,
the UK is only number five in Europe as a fund domicile. See page 18.
Passporting. This refers to the right for firms inside the EEA to use their domestic regulatory
authorisation to carry on activities or sell financial products in other EEA member states. Some
EU regulation foresees the possibility of third country passports: ie. the ability of countries
outside the Union to benefit from a passporting regime.
For example:
l A UK investment manager may provide institutional asset management services to a
Dutch pension scheme using a segregated mandate under the MiFID passport.
See page 22.
l A UK domiciled investment fund may be distributed across the EU under the UCITS
passport. See page 26.
Equivalence: Third country passports and other ways to access clients in the EU are subject to
equivalence rules – so that the relevant supervisor can be satisfied that the third country firm or
product is subject to regulation that is equivalent to EU standards.
For example, the United States regulatory regime may be deemed equivalent for the purposes
of providing portfolio management services in a European domiciled fund.
NB: There are different equivalence conditions associated with different market access routes.
More details of the technical requirements are in the annex.
10
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
INTERNATIONAL PROMOTION
The industry’s strengths have been recognised by the successive UK governments which have
sought to promote the asset management sector as a driver for growth in UK financial services,
exports and jobs. The Financial Services Trade and Investment Board2 (FSTIB) is focussed over the
next two years on boosting exports and investment in asset management, one of three sectorial
focus areas alongside insurance and FinTech. FSTIB is also prioritising collaboration in financial
services with China, India and the US in order to boost UK exports and investment.
The Investment Association is committed to working with government on future trade deals (as
well as current dialogues) with countries to ensure that UK asset managers have the routes to
access markets throughout the world. That work has already commenced in our role as delivery
partner to the FSTIB investment management priority workstream.
The Investment
Association is
committed to
working with
government on
future trade deals
With the EU’s Capital Markets Union (CMU) project recognising the fundamental importance
of the role of market-based finance, there is also significant potential opportunity ahead for
exporting UK expertise. Portfolio management desks in the UK are responsible for the oversight
of substantial holdings of European (ex-UK) assets (e.g. around £650 billion in European (ex-UK)
equities), giving the UK a significant role in wider EU capital market activity. Encouraging greater
individual saving for the long-term through investment vehicles such as funds, rather than less
productive routes such as bank deposits or building society accounts could support both CMU
and associated demand-side initiatives.
RETAINING THE INTERNATIONAL ATTRACTIVENESS OF THE UK
The long-term attractiveness of the UK as a place to do business goes beyond what terms of
access to the single market are negotiated. It is also important to consider how Brexit will impact
perceptions of wider international competitiveness. Many businesses investing into the UK will
have done so on the assumption that terms of access to the EU single market would have been
more dependable than the referendum result has now implied. They will be watching closely how
other factors evolve.
International firms determine their choice of location by multiple factors. Some, such as time
zone, language and legal structure are relatively immutable, but others may be far more variable
over time. Outside of the EU, we expect the UK to have more control of rules relating to import/
export access, immigration, regulation and tax. How this control is exercised will influence the
UK’s future competitiveness.
The investment management industry benefits from being able to attract staff both from other
parts of the EU and other parts of the world and the world class pool of talent available in the UK
is one of the key competitive advantages of the UK.
The future regulatory approach is also likely to be of considerable importance. None of this
means seeking to lower regulatory standards or create a ‘light touch off-shore regime’. However, it
does necessitate a serious focus on ensuring, in tandem with the wider EU negotiations, that the
UK is able to retain its wider international attractiveness.
2
https://www.gov.uk/government/organisations/financial-services-trade-and-investment-board
11
Our Brexit member
survey of October
2016 shows
that 11% of the
workforce of IA
member firms is
made up of non-UK
EEA nationals.
THE INVESTMENT ASSOCIATION | BREXIT SERIES
3 BREXIT
RECOMMENDATIONS
PROTECTING THE ABILITY FOR UK ASSET MANAGERS TO PROVIDE SERVICES
TO EU-BASED CLIENTS IS CRITICAL TO AVOID DISRUPTION TO CLIENTS AND
THE ECONOMY, AND TO PROTECT THE INTEGRITY OF THE FINANCIAL CLUSTER
IN THE UK.
THE INVESTMENT ASSOCIATION HAS IDENTIFIED EIGHT OBJECTIVES TO
ENABLE THE INVESTMENT MANAGEMENT SECTOR TO MAKE A SUCCESS OF
BREXIT. THE RECOMMENDATIONS BELOW COVER PRIORITIES WHICH WILL
NEED TO BE ACHIEVED DIRECTLY IN NEGOTIATIONS WITH THE COMMISSION
AND THE EU27, ALONGSIDE POLICY RECOMMENDATIONS FOR THE UK
GOVERNMENT AND THE FCA WHICH SHOULD BE PURSUED IN CONJUNCTION
WITH AND SUBSEQUENT TO BREXIT NEGOTIATIONS.
DELEGATION OF PORTFOLIO MANAGEMENT
Both EU and UK investors delegate management of their portfolios to UK investment managers
either directly or by investing in funds set up in the UK or other EU countries and which are
managed in the UK. These investors include individual retail investors, institutional investors such
as pension funds or insurers and corporates in both the EU and UK.
The delegation of portfolio management to third country firms is permitted under the existing
regulatory framework of MiFID, UCITS and AIFMD and is an international convention that ensures
that funds are able to source the right expertise for a range of different investment strategies.
However, the vulnerability of this position is that the EU may, in future, seek to tighten the rules on
delegation such that EU funds and mancos would find it more difficult to delegate.
1
RECOMMENDATION 1
In order to preserve the ability to serve clients in the EU, the FCA should enter into
the relevant cooperation agreements with regulators throughout EU Member States
immediately on Brexit to ensure these delegations can continue without interruption.
REGULATORY COOPERATION
A range of different market access routes may, in theory, be available to investment managers
even in the case of a hard Brexit, in which no general agreement is reached between the UK and
the EU to retain membership of the single market and passporting rights for UK firms.
However these rely on the willingness of the EU or EU member states to permit access to UK firms
– either through a formal equivalence assessment by the Commission (for example for the MiFID
II third country passport), or through cooperation agreements that permit delegation.
This position is vulnerable to future changes in EU regulation, under which future divergence
in regulation between the UK and the EU, as well as political matters, may result in loss of
equivalence. Without measures to safeguard regulatory coherence between the UK and the EU,
and the mutual recognition of regulatory regimes in the UK and the EU, the UK could be seen to be
lacking the stability in its regulatory framework to safeguard long-term business planning.
In this context, it is important to recognise that ‘access’ is reciprocal, and that many international
firms that choose the UK as a place to do business make use of passporting rights to provide
services from other EU member states into the UK. It is critical to ensure the continuity of service
12
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
being provided to UK investors, whether the service is being provided by UK firms or firms from
other EU member states.
Finally, CMU is an EU project that both needs to survive Brexit and could benefit significantly from
British capital market expertise. The close integration of the UK investment management industry
into future EU capital market activity should be a key goal and reinforces the ‘future proofing’ that
comes with preservation of market access rights.
2
RECOMMENDATION 2
The UK Government should seek long term mutual recognition of the regulatory
regimes in the UK and the EU, through the institutionalisation of regulatory
cooperation which recognises the benefits of regulatory harmonisation across Europe
and the rest of the world. This requires a pro-active and responsive approach by UK
regulators and goes beyond bilateral agreements and MOUs. We would urge early
consideration of the implications for FCA activity, including resources.
MULTI-LEVEL NEGOTIATION
The long-term success of the UK as an asset management centre serving the EU27 market
depends both on formal EU regulatory provisions and access to national markets without
restrictions arising from national discretion. This means that the UK government needs to ensure
as far as possible a set of agreements at both EU and national level, rather than focus solely on
EU-level legislative provisions.
Access to national markets may be available outside of the formal EU regulatory framework.
A number of Member States permit cross border provision of services, including many of
the Member States that UK investment managers have a focus on (e.g. Luxembourg, Ireland,
Netherlands, Germany, Finland and Sweden). However such access is normally complicated by
the need to understand local interpretations and nuances in the implementation of regulation.
Greater clarity should be sought on a number of different points of interpretation and
implementation, including:
l Whether business is regulated when carried out “in” as opposed to “into” the country
l What the local interpretation is as to when business is carried out in the country
(characteristic performance)
l Which exact activities are regulated in the country (e.g. marketing and/or provision) and how
they are defined
l The scope of any permissions and exemption, including client types which can be
approached, volume constraints, fly-in restraints
l Whether any local presence on the ground (e.g. having a management company or other
group entity in the territory) impacts on the ability to rely on permissions and exemptions
l Whether a MiFID II equivalence decision for the UK would have an impact on firms being able
to continue to use existing national regulations that permit third country access.
3
RECOMMENDATION 3
If the UK leaves the Single Market, UK Firms providing services to EU-based
institutional clients outside of the Single Market will find differing rules across EU
Member States, including some local rules permitting cross border services. The
UK should seek clarification from EU Member State regulators and an agreement
to provide certainty to UK firms providing cross border services, and cross border
distribution.
13
THE INVESTMENT ASSOCIATION | BREXIT SERIES
MIFID II THIRD COUNTRY PASSPORT
Despite the limitations of the MiFID II third country passport provisions noted in the case studies
in the annex, we believe that the timely access to the passport (immediately on Brexit) could
provide a significant mitigant to some of the immediate transitional disruption that may arise on
Brexit pending an agreement on full mutual recognition.
As part of the negotiation on Brexit the UK could explore ways in which, subject to broader
agreements on regulatory coherence that would provide a robust and predictable equivalence
adjudication, modifications of MiFID could be sought that would allowing conditional access to
retail clients for UK firms providing MiFID services.
4
RECOMMENDATION 4
Recognising the limitations of the existing EU equivalence framework for a future
relationship with the UK, the UK Government should seek as an interim transitional
measure and pending full mutual recognition, a roadmap for access to the MiFID
third country passport (including obtaining an equivalence assessment from the
Commission) to be implemented immediately on Brexit.
FUND AND MANCO PASSPORTING
Although in practice, few firms use the UCITS and AIF passports, the loss of UCITS status, and the
need to establish mancos within the EEA for existing EEA UCITS funds would be greatly disruptive
for firms that do, as well as for investors of funds that currently use the passports.
5
RECOMMENDATION 5
The UK should negotiate maintaining UCITS status for UK qualifying funds and mancos,
or at minimum to provide grandfathering for existing UK UCITS and UCITS mancos.
Likewise the UK should ensure that those EU27 UCITS and AIFs which are marketed
into the UK can continue to be held and bought by UK investors.
ACCESS TO MARKET INFRASTRUCTURE
The position of UK’s capital markets is supported by the critical mass of investment firms and
investors either located in the UK or accessible from the UK. This sustains deep pools of liquidity
and ensures efficient and well-functioning capital raising and trading activity across all asset
classes.
Moreover, UK and European capital markets and market infrastructure are highly interconnected.
While the UK is the predominant location for trading venues and related infrastructure, their
ability to operate across Europe under a wide range of EU regulations including MiFID and
EMIR has enabled the development of critical mass in different products and markets, created
economies of scale and possibly lowered the cost of a number of services.
14
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
Due regard should be given to the importance not just of individual segments within the UK
financial services, but to the cluster of which those segments form a part. Efforts should be made
to ensure that the negotiations do not result in a line-by-line analysis of relative advantages that
results in damage to the overall coherence and contribution of UK financial services
6
RECOMMENDATION 6
The UK Government should safeguard access to market infrastructure in the UK,
avoiding fragmentation of the UK’s cluster.
ACCESS TO TALENT
The asset management industry notes that its strength both in serving domestic and
international clients from the UK has been based on the ability to access the right skill sets
internationally, including across the EU. The IA’s Brexit survey of member firms shows that 11% of
their workers are non-UK EEA nationals.
7
RECOMMENDATION 7
The Government must give consideration to the availability of skilled workers. This
does not pre-suppose a specific industry position on free movement, but requests
appropriate mechanisms to meet the needs of industry.
COMPETITIVENESS OF THE UK
Brexit leads us to a broader issue about the need to preserve the UK’s own international
attractiveness as a place to do business. While a critical factor for inward investors has been
access to the EU single market, other factors are clearly at work, including relatively immutable
attractions such as time zone and language. These are necessary but not sufficient conditions for
international success and consideration will need to be given to other factors such as domestic
regulatory environment, while ensuring that the domestic regime also affords high standards of
protection to UK savers and investors.
8
RECOMMENDATION 8
The Government should consider and seek to enhance the wide range of factors which
enable the UK to compete as an international financial services centre.
15
THE INVESTMENT ASSOCIATION | BREXIT SERIES
ANNEX: CASE STUDIES
Whether full access to the single market can be preserved is a matter to be determined in the
political negotiation and the direction of the negotiation remains to be discovered. In this section,
we present in-depth analysis of the regulatory provisions that currently enable passporting of
services and products and delegation to UK asset managers. We have also looked at the potential
consequences of loss of access, and the provisions that UK asset managers would be required to
operate within when providing services and products to clients in the EU single market as third
country firms.
We have found that outcomes short of the existing terms of single market access might suffice to
enable continuity of business by UK investment managers to their clients and investors elsewhere
in the EU. For example, existing provisions in key EU financial services legislation such as UCITS
and AIFMD allow delegation of services to firms in third countries.
HEADLINE FINDINGS
Investment Association member firms currently access the EU single market to provide services
to investors in the EU in a variety of different ways – passporting services or products, receiving
delegations from UCITS or AIFMD management companies in the rest of the EU, or contracting
outside of the scope of UCITS, AIFMD or MiFID with clients or investors in the rest of the EU.
In order to analyse the impact of Brexit, we have examined three case studies of asset managers
providing services to end clients within the EEA looking at scenarios of services being provided
on a pooled basis (whereby end clients are pooled in funds, typically sold to particular categories
of clients in particular locations) or segregated basis (whereby investment managers manage
portfolios on behalf of specific end clients). This is shown in the diagram opposite.
In practice, the way in which these services are provided may involve a complex set of regulatory
mechanisms. For example, a fund could be domiciled in Ireland, with portfolio management in the
UK (or elsewhere in the EU or a third country), and marketed from the UK across the EU using a
MiFID firm.
ALL CONTENT AND DESIGN WORK © COPYRIGHT OF JACK RENWICK STUDIO 2014
In the following sections we analyse the high level impact on the types of service and market
access mechanisms that will be disrupted by Brexit. We use a traffic light analysis to indicate
the relative importance or each provision and a measure of how disruptive a hard-Brexit
scenario is likely to be in the short term.
16
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
INVESTMENT MANAGERS PROVIDING SERVICES FROM THE UK TO
• UK
FUNDS
Location of
investor
SEGREGATED MANDATES
FUNDS
FUNDS
Location of
fund/manco
• EU
EUUKEUUK
EUUK
INVESTORS1INVESTORS2INVESTORS3INVESTORS4 INVESTOR5INVESTOR6
INST I
INST I
T
IONAL
IONAL
AUM as
percentage of
total AUM of
IA member firms
UT
UT
Assets Under
Management7
(AUM) (£m)
T
31,095 837,3271,131,020 88,195 273,6302,268,651
1%15%20%2% 5%40%
Key issues
Fund
No Brexit
Delegation Fund
Regulation No Brexit
passport
impact
of portfolio passport
of cross
impact
management(inward
border
Fund
passporting)provision of
distribution
Manco
services
passport
Delegation of
Fund
portfolio
distribution
management
MiFID II
NB figures are not directly comparable as different data sources have been used:
Exclusions: The above does not capture assets managed for clients on a pooled basis outside of authorised funds
(e.g. close-ended investments and life funds).
1
Non-UK EEA investors in UK domiciled UCITS. Source Brexit survey
2
UK Investors in UK domiciled funds. Source IA monthly fund statistics data.
3
Non-UK domiciled UCITS or AIFs that are portfolio managed in the UK. Source IA Brexit survey
4
UK investors in overseas funds run by IA members. This may include some funds located outside of the EU.
Source IA monthly fund statistics.
5
AuM reported to the IA originating from EU (ex UK) clients under segregated mandates. Source Brexit survey
6
UK Institutional Client assets. Source IA Asset Management Survey. Not all assets will be portfolio managed in
the UK. We estimate that approximately 90% of UK institutional assets are managed in the UK.
7
Based on survey of IA members carried out in October 2016
17
THE INVESTMENT ASSOCIATION | BREXIT SERIES
CASE STUDY ONE: A UK ASSET MANAGER MANAGING EU FUNDS
S
ND
• EU FU
Our Brexit member
survey of October
2016 shows that
73% (£619bn) of
all non-UK UCITS
managed from the
UK are managed
under delegation
arrangements.
The remaining
27% (£299bn) are
managed under
arrangements using
a management
company passport
based in the UK
(although a much
higher proportion
of EU AIFs are
managed from
the UK using a
management
company passport
(75%) - see below).
DELEGATION OF
PORTFOLIO MANAGEMENT
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
Under both the UCITS and AIFM Directives, portfolio management of a UCITS or AIF can be
delegated to a separate portfolio manager, based in a third country. This delegation provision,
which is unconnected to the fund passports, is already frequently used. For example, US firms
that perform portfolio management on a delegated basis for Irish-based UCITS, albeit subject to a
number of conditions.
UCITS requires that where investment management is delegated to a third country firm, that
firm must be authorised in its home jurisdiction for carrying out asset management and must be
subject to prudential supervision. UK investment managers should comfortably meet this test.
The Directive further states that cooperation between the supervisory authorities concerned
must be ensured. However, the Directive is silent as to what “cooperation” means and this will
accordingly be for the relevant EEA regulators to determine. The model is therefore likely to rely
on each relevant EEA regulator (e.g. the CBI or the CSSF) determining that the FCA is able to
cooperate with them.
Under AIFMD the provisions on delegation are similar, with AIFMD being more specific in relation
to the requirements under a cooperation agreement between supervisory authorities.
The pre-existence of regulatory provisions with UCITS and AIFMD that allow the delegation of
portfolio management to third country firms leads us to conclude that there should be little
disruption to UK firms providing portfolio management on a delegated basis in the short term
as a result of Brexit. However, this position is vulnerable to changes in the way the EU regulates
delegation. Without measures to safeguard regulatory coherence between the UK and the EU, it
is possible that a future iteration of UCITS or AIFMD may look to tighten the provisions around
delegation.
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A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
The report of the Technical Committee of IOSCO on delegation of functions4 provides principles
to underpin the regulation of delegated functions (in particular portfolio management). However,
the proliferation of delegation to third countries that will result from using UK-based portfolio
managers after Brexit could result in these principles being seen as minimum standards, and
could result in greater regulatory scrutiny.
MANCO PASSPORTING
FROM UK
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
The management company passport enables a management company in one member state to
act as the management company to funds in other member states, either on a cross-border basis
or through establishing branches in those other member states. A UK management company can
therefore currently use this passport to manage funds established in Ireland or Luxembourg, for
example.
A firm can only act as the management company of a UCITS if it is domiciled within the EU. After
Brexit, existing UK UCITS management company may need to establish an EEA domiciled entity
with the appropriate substance and infrastructure to act as a UCITS management company.
Such a management company could delegate portfolio management to a UK-based investment
management entity, as described above. Whilst this model requires an appropriate number of
compliance, risk and operational staff to be located in the relevant EEA Member State, it enables
the portfolio managers to remain in the UK.
The same is true for AIFMD, except that AIFMD also provides for third country passports: i.e.
passports that will, once “switched on”, enable a non-EU AIFM to manage an EU AIF and/or
to market an AIF (EU or non-EU) to professional investors in the EU, subject to a number of
conditions being satisfied.
Introduction of the third country passports is being undertaken on a country-by-country basis,
and will require a further delegated act to be issued by the European Commission, following
positive advice from ESMA on each non-EU country. To date, ESMA has issued positive advice only
for Canada, Guernsey, Japan, Jersey and Switzerland, although the European Commission has not
yet issued the delegated act to switch on the third country passports to these countries.
After Brexit, therefore, the availability of the AIFMD third country passports to UK AIFMs will
depend on (i) positive advice from ESMA and (ii) the Commission then agreeing to “switch on” the
third country passport for the UK.
SALES OF FUNDS
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
Marketing, sales and distribution of funds can be done through a number of routes. In our Brexit
survey we have asked our members to catalogue the permissions used to carry out sales and
distribution of funds. The responses (expressed as a percentage of members that use each
approach) are shown in the table below.
4
Delegation of Functions (December 2000) https://www.iosco.org/library/pubdocs/pdf/IOSCOPD113.pdf
19
Our Brexit survey
shows that £299bn
of assets are
managed using a
UK management
company
passporting
services to a nonUK UCITS fund,
while a similar
amount (£213bn) is
passported to nonUK EEA AIFs (which
is a much greater
proportion (75%) of
AIFs).
THE INVESTMENT ASSOCIATION | BREXIT SERIES
HOW IA MEMBERS MARKET, SELL OR DISTRIBUTE UCITS CROSS-BORDER IN EEA MARKETS (EX UK)
65%
34%
34%
0%
43%
6%
13%
0%
37%
3%
3%
6%
6%
65%
From a UK MiFID firm
From a UK based UCITS management company
From a branch of a UK MiFID firm present in the EEA market
From a branch of a UK UCITS manco present in the EEA market
From a company in the same corporate group as a UK firm but present in the EEA
market
From some other presence in the EEA market
From a branch of a UK MiFID firm elsewhere in the EEA (other than the UK or the
local market concerned)
From a branch of a UK UCITS management company elsewhere in the EEA (other
than the UK or the local market concerned)
From a company in the same corporate group as a UK firm but elsewhere in the EEA
(other than the UK or the local market concerned)
From a business that is not an EEA entity but accesses markets using cross-border
licensing exemptions
From a business that is not an EEA entity but accesses markets using cross-border
licensing regimes
From a business that is not an EEA entity but accesses markets using reverse
enquiry
From a business that is not an EEA entity but accesses markets using residual
national private placement regimes for UCITS funds
Using the services of a third party distributor (or third party platform) which is
domiciled in an EEA member state (ex UK)
Post-Brexit, it is likely that, where the sale and distribution of funds to EEA investors is being
carried out by a UK UCITS manco, this may need to move outside of the UK (persuant to
establishing a UCITS manco in the EEA, as a result of the UK losing UCITS status, as outlined
above).
In relation to distribution services provided by a MiFID firm, the position is less clear. “Marketing”
is not an activity which is listed in Annex 1 of MiFID as an investment service.
In countries such as the Netherlands and Sweden, “pure marketing” (i.e. marketing activity which
does not amount to the MiFID investment services of either investment advice; or reception and
transmission of orders) is not deemed to be an activity which will trigger a licensing requirement.
20
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
However, in Germany, Ireland and Spain there are specific legal provisions which state that the
marketing or promotion of investment services is deemed to trigger the local implementation of
MiFID or cannot be undertaken without a licence or the benefit of an exemption.
There is also a further group of countries, including Belgium, where, although the law states that
it is the “provision” of investment services which is a licensable activity and there is no formal
regulatory guidance to the contrary, the common legal interpretation is that this also extends to
the marketing and promotion of such services5.
Given the variations in interpretation of MiFID, it is also unclear whether the implementation of
the MiFID II third country passport (see below) will mitigate the impact for firms using a UK MiFID
licence for distributing funds in the EU.
FUND PASSPORTING
BACK TO THE UK
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
The fund passport enables UCITS established in one member state to be freely marketed
(including to retail investors) in another member state, subject only to a straightforward
notification process. The UCITS itself remains subject to the supervision of its home member
state regulator.
UK asset managers of EU-domiciled funds may wish to continue to sell EU funds into the UK. For
example all passive ETFs are domiciled outside the UK and therefore distribution to UK investors
generally relies on the UCITS fund passport. The UK currently does not have a domestic ETF
passive fund market offering.
Our view is that retaining the ability to sell EU-based UCITS funds in the UK is vital in order to
preserve choice and competition in the UK funds market, regardless of the outcome of other
points of negotiation for the UK.
5
Brexit Series 4 – Cross border provision of services – provides further details of requirements in individual EU Member
States.
21
THE INVESTMENT ASSOCIATION | BREXIT SERIES
INST I TU
CASE STUDY TWO: UK ASSET MANAGERS MANAGING SEGREGATED
MANDATES FOR EU INVESTORS
NAL
T IO
I
T I TUT IONA
NS
L
INST I TUTIO
L
NA
CROSS BORDER PROVISION
OF INVESTMENT SERVICES
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
The legal framework currently governing the provision of investment services by asset managers,
other than AIFMs and UCITS managers, is MiFID. MiFID II will repeal and recast MiFID and must be
transposed into UK law by 3 July 2017 and MiFID II will apply from 3 January 2018. It is therefore
anticipated that MiFID II will come into force before the UK exits the EU.
MiFID regulates a range of financial services and activities, in relation to financial instruments.
Firms authorised to provide MiFID services by their home country supervisor can freely perform
those investment services across the EU (the ‘MiFID Passport’). A survey of IA members shows
that £244bn is currently managed from the UK to non-UK EEA clients under the MiFID passport
of a UK firm. Conversely, only £29bn is provided under a delegated mandate from a non-UK MiFID
firm.
Due to the rules being codified in a Directive, it was necessary for the individual Member States
to implement the provisions into national law, rather than the legislation taking direct effect. The
national legislative implementation processes opened the door to provisions being adopted and
interpreted in various ways.
For example, the Directive states that “Each Member State shall require that the performance of
investment services or activities as a regular occupation or business on a professional basis be
subject to prior authorisation…”. It does not make it clear whether there is a requirement that this
should be the case when such an activity is being carried out on the ground in the Member State,
22
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
or whether it is equally applicable to firms operating from outside the EU into the Member State
(i.e. on a cross border basis).
The way in which the MiFID cross border services passport operates negates any current need for
UK firms which are relying on it to understand the nuances and differences underlying the way in
which MiFID has been implemented across the 27 countries. However, the current MiFID passport
is not available to non-EU firms, so these nuances and differences become very relevant after
Brexit. A third country passport is available under MiFID II and is discussed further below.
Firms providing cross border investment management services will find differing rules across all
EU member states. EU Member States can be grouped into three categories – those that do not
regulate service provided into the country, those that have permit services being provided into
the country under notification to the local supervisor, and those that require a local presence in
a country in order to provide services to clients in that country. This is summarised in the table
below.
CROSS BORDER REGIMES
NO CROSS BORDER REGIME
No regulation of cross border services, or broad exemptions apply
Permit cross border
services under
notification
Local presence required
Ireland
BelgiumAustria
LuxembourgDenmark Bulgaria
Sweden EstoniaCroatia
United Kingdom
Finland
Cyprus
Germany
Czech Republic
Italy*France
NetherlandsGreece
SpainHungary
Latvia
Lithuania
Malta
Poland
Portugal
Romania
*Local presence likely
to be required in practice
Slovak Republic
Slovenia
Our analysis specifies that there remains significant discrepancy and uncertainty around
a number of issues related to MiFID services, including specific licensing and notification
requirements, the scope of permissions, including client types which can be approached via
particular routes, volume constraints, fly-in restraints, and whether the same interpretation of
law is expected post MiFID II implementation.
23
THE INVESTMENT ASSOCIATION | BREXIT SERIES
Although currently
only an estimated
£29bn of AUM of
IA member firms
is managed under
delegation from a
non-UK MiFID firm,
this route is likely
to become more
important when the
UK does not have
access to the MiFID
passport.
DELEGATION OF PORTFOLIO
MANAGEMENT FOR SEGREGATED
MANDATES
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
Like UCITS and AIFMD, MiFID contains outsourcing provisions that permit portfolio management
services to be delegated to a third country firm. Furthermore, MiFID II brings the outsourcing
requirements of MiFID in line with those that exist under UCITS and AIFMD.
MIFID II THIRD
COUNTRY PASSPORTING
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
MiFID II introduces two new passports for third country firms that could mitigate the position for
UK firms providing services to clients in EU countries that otherwise require the establishment of
a locally licenced entity.
The two passports are a cross-border passport and a branch passport for third country firms:
The “Cross-Border Passport” – allows firms to provide investment services to per se professional
clients and to eligible counterparties without having to establish a branch in the EU, subject to a
number of conditions – notably, an equivalency assessment by the European Commission with
respect to that third country.
The “Branch Passport” – subject to individual Member States opting in to this passport, this
allows firms to establish a branch in an EU member state to provide investment services to all
types of client in the member state. Therefore, to provide services to either retail clients or elective
professional clients a third country firm would need to set up a branch in the EU member state in
which it wanted to provide its services rather than operating on a cross-border basis.
While the third country passport provides a theoretical mitigant for the impact of Brexit for the
cross border provision of services, there are a number of caveats:
l It depends on an equivalence assessment by the Commission but equivalence does not
provide the basis for long term business planning and strategy. Equivalence assessments
for MiFID II are made by the Commission and could be subject to political influence. It can be
withdrawn at any time, and may require the UK to be a rule taker in respect of future changes
in EU regulation to maintain equivalence.
l The cross border passport does not provide access to retail clients.
l There is uncertainty around the timing of introduction of the passport (and the equivalence
assessment), so it is currently unclear whether the passport will be available immediately on
Brexit.
l The introduction of the MiFID third country passport may have an impact on existing national
rules for third country access. It is unclear whether countries will replace existing national
regime with the MiFID third country passport once implemented.
24
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
REVERSE
ENQUIRY
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
Another route to market for UK firms could be that of reverse enquiry. Reverse enquiry covers the
situation where an EU client, under its own initiative, requests investment services and activities
from a third country firm. The concept of reverse enquiry is not currently harmonised across the
Member States. Some Member States, such as Austria, do not recognise it as a legal or regulatory
concept at all, even on a tolerated basis. Others either accept it as a tolerated market practice or
have it codified in their laws or regulations. An additional layer of complexity stems from the fact
that those Member States which do recognise the concept do not all view it in the same way. This
means that there are different interpretations/understandings as to:
l what a reverse enquiry actually is;
l how and if it is possible to rely upon it; and
l whether an initial reverse enquiry takes the whole relationship with the client outside of
the licensing regime, or whether the reverse enquiry can only be relied upon for the specific
transaction for which the original request was made.
It should be noted that the text of MiFID II contains the concept of ‘reverse enquiry’, but its
availability and application after MiFID II implementation will be dependent on how Member
States interpret the key concepts of ‘own exclusive initiative’ and ‘relationship’ under the relevant
provisions
25
THE INVESTMENT ASSOCIATION | BREXIT SERIES
CASE STUDY THREE: UK ASSET MANAGERS DISTRIBUTING UK FUNDS TO
EU CLIENTS
• UK
FUNDS
FUND
PASSPORTING
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
The UK is not a major fund export centre in comparison to Ireland or Luxembourg. Based on our
Brexit survey we estimate that £31bn is held by EU investors in UK funds6. Overseas sales are less
than 1% of overall sales of UK-domiciled funds.
After Brexit, UK funds will no longer be capable of being classified as UCITS. As a result, they will
lose access to the UCITS fund passport and will not be freely marketable to retail investors in the
EEA unless the UK arrives at a deal with the EU to preserve the ability for UK funds to retain UCITS
status.
SALES AND DISTRIBUTION
OF UK FUNDS
IMPORTANCE
TO UK
INVESTMENT
MANAGEMENT
DISRUPTION
CAUSED
BY
BREXIT
Following Brexit, UK UCITS will become non-EEA AIFs, and will not be able to be marketed in the
EEA, unless and until the AIFMD third country passport is switched on (see above). Until then, the
sale of non-EEA AIFs is subject to local national private placement regimes across the EEA.
6
26
Other data puts overseas investors of UK funds at c.£70bn (which includes non-EU investors). We believe that the
discrepancy may also be related to the samples used for each data set.
A NEW RELATIONSHIP WITH THE EU: THE UK ASSET MANAGMENT ROADMAP
GLOSSARY
KEY CONCEPTS
Delegation: Means that a third party has been engaged to carry out certain tasks on behalf of the
principal. For this paper we refer specifically to the delegation of portfolio management services
to a UK portfoliof manager by a fund, manco, or EEA MiFID firm.
Manco: The entity that provides the management of a fund. Management may involve portfolio
management, risk management, the administration and marketing of funds as well as certain
activities related to the assets of funds. A manco may delegate certain services to a third party,
and in this paper we make reference extensively to the delegation of portfolio management
services.
Passporting: The right for firms inside the EEA to use their domestic regulatory authorisation to
carry on activities or sell financial products in other EEA member states.
Third country passport: Provisions that grant passporting rights to firms outside the EEA.
Equivalence: Third country passports and other forms of accessing clients in the EU are subject
to equivalence rules – so that the relevant supervisor can be satisfied that the third country firm
or product is subject to regulation that is equivalent to what it would have been subject to if it was
based within or originated from the EU.
OTHER TERMS
AIF: Alternative Investment Fund
AIFM: Alternative Investment Fund Manager
AIFMD: Alternative Investment Fund Managers Directive
CMU: Capital Markets Union
EEA: European Economic Area
ESMA: European Securities and Markets Authority
EU: European Union
FCA: Financial Conduct Authority
Fund: An undertaking for collective investment (UCI). In this paper we use fund to refer to UCITS
and AIFs
IOSCO: International Organisation of Securities Commissions
MiFID: Markets in Financial Instruments Directive
Third country: A country not within the EEA
UCITS: Undertakings for the Collective Investment in Transferable Securities
27
THE INVESTMENT ASSOCIATION | BREXIT SERIES
28
The Investment Association
Camomile Court
23 Camomile Street
London
EC3A 7LL
www.theinvestmentassociation.org
@InvAssoc
November 2016