Mark Gilbert, Bloomberg
As negotiations about the terms of the U.K.’s departure from the European Union rumble on interminably, it’s pretty clear that the future relationship will be fractious at best. For the asset management industry, the fight around cross-border arrangements for overseeing investments is reigniting, with London’s hedge funds stuck in the crosshairs.
The shoe is pinching around so-called delegation rights, the rules that allow funds to be marketed and sold in one country and managed from another. Depending on how cynical you’re feeling, the EU is either concerned that post-Brexit Britain will leave savers exposed to a laxer regulatory regime, or it sees a one-time opportunity to attract a chunk of the lucrative asset-management industry away from London.
There’s a lot at stake. About 8.5 trillion pounds ($11 trillion) is overseen by U.K. fund managers, according to the Investment Association. Some 3.6 trillion pounds of that is on behalf of overseas customers, with European accounts contributing about 2.1 trillion pounds of the total. British-based hedge funds oversee an additional 350 billion pounds, the IA estimates.
In January 2019, an attempted power grab by the European Securities Markets Regulator was rebuffed by the European Parliament. ESMA had sought more control over the supervision of delegation rights; lawmakers made it clear that national watchdogs would remain the arbiters of what is and isn’t acceptable in outsourcing those fund-management activities.
But in August, ESMA said the current arrangements lead to increased market risk. And last week, the European Commission opened a consultation on reviewing the rules for so-called alternative investment funds (AIFs), which includes hedge funds, private equity and real estate.
One of the stated aims of the review, which asks industry participants to answer 102 questions by the end of January, is to secure “a wider choice of AIFs for investors while at the same time ensuring that EU AIFMs [hedge funds] are not exposed to unfair competition or are otherwise disadvantaged.” Hold the questionnaire up to the light and it’s clearly watermarked with the sentiment, “how can we win more asset management business back from London?”
Question 50, for example, asks “are the delegation rules sufficiently clear to prevent creation of letter-box entities in the EU,” which reflects concern that firms might have no physical presence beyond a brass plaque on a building, with all of the staffing housed outside of the bloc. Question 52 goes on to ask whether existing rules should be expanded to include “quantitative criteria” or “a list of core or critical functions that would always be performed internally and may not be delegated to third parties,” which could hobble the ability of non-EU firms to manage money for the region’s savers. A courtroom judge might reasonably assess these lines of questioning as leading the witness.
Brussels has made no secret of its disquiet at the prospect of the City of London answering only to its local regulator while continuing to act as the key venue for a vast swathe of euro and European trading activities. The likelihood that divergences between the regulatory regimes will increase in the coming years — either because one side seeks to gain a local advantage by loosening its rules, or as a result of natural drift over time — means the status quo is unlikely to persist for long.
Delegation isn’t just an issue for the U.K. asset management industry. It’s a global framework, and restricting its use could deprive, say, a saver in Italy from harnessing the skills and local knowledge of portfolio managers in the U.S. or Asia. Moreover, Luxembourg and Ireland are also big beneficiaries of the prevailing regime.
But for financial services in general and fund management in particular, the post-Brexit landscape remains vulnerable to attempts at land grabs and terraforming. Let’s hope that greed and mistrust don’t conspire to produce a savings environment that leaves both European investors and U.K. money-management firms worse off.
No Comments