Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.
Published by Charles Gubert
The simplicity by which an AIF or UCITS can structure itself in an onshore EU market (Luxembourg, Ireland, Malta) and delegate the running of its portfolio and oversight of risk management back to the manager in a third country is a fundamental reason as to why both of these brands have enjoyed considerable popular appeal and global success.
Put simply, delegation is a cost-effective way of getting an AIFM or UCITS running without having to invest in onshore physical infrastructure. That the European Securities and Markets Authority (ESMA) is potentially calling into question this existing set-up should alarm not just UK asset managers, but investment firms all over the world.
Brexit is obviously the impetus behind ESMA’s proposals. It is no secret that some of the EU 27 have been trying to capitalise on the uncertainty in the UK to attract business into their domestic markets. ESMA has repeatedly warned these countries that standards cannot be loosened otherwise it risks creating regulatory divergences.
The regulator has also warned UK financial institutions against setting up letterbox entities in the EU 27 as a tool by which to continue passporting cross-border. The funds’ industry opposes the creation of letterbox entities, but the present regulatory structure in major onshore European fund domiciles around delegation is mature and substantive, a point made by industry groups including the Association of the Luxembourg Fund Industry (ALFI).
Some of the core proposals include forcing managers to appoint at least three people in their EU fund domicile, and it is also very probable that delegated activities will be subject to even more regulatory scrutiny. This will inevitably bring added costs and requirements to the funds world, eating into the revenues and returns of boutique asset management providers.
The cost of running an AIFM and UCITS – with its existing depositary and reporting obligations – is high, and many boutiques could end up shunning both brands, particularly if their European flows are small relative to other markets. In short, this protectionist measure would immediately reduce European investor access to boutique providers as non-EU firms look to distribute their fund vehicles elsewhere, and outside of the EU’s regulatory oversight.
UCITS has had a stranglehold on APAC and Latin American markets for quite a few years now. At a recent ALFI Conference in Luxembourg, financial services professionals from APAC and Latin America spoke extensively about their own various regional fund passporting initiatives. If delegation is scrapped or impeded, a manager in Sao Paolo or Hong Kong will likely pivot towards a regional fund passporting solution as opposed to UCITS.
Financial services regulators that comprise ESMA often applauded the UK’s Financial Conduct Authority’s (FCA) contributions to policy discussions, acknowledging that it curtailed some of the worst excesses of protectionist rulemaking in favour of free market thinking. With the FCA's role within ESMA much diminished now as a consequence of Brexit, the risk of protectionist market initiatives such as the restrictions around delegation have risen and UK firms need to keep a close eye on developments.