Asset managers are negotiating “uncharted waters” in the wake of the UK’s decision to leave the European Union, with key questions surrounding fund domiciles, MiFID II requirements, and whether groups need to bolster their European presence to distribute on the continent, still up in the air.

Although fund providers M&G Investments and Columbia Threadneedle have outlined plans to boost their operations in Dublin and Luxembourg respectively, Investment Week understands the majority of firms are yet to make a move.

They are resisting any knee-jerk reactions at this stage as there is still a high level of uncertainty on post-Brexit regulatory requirements. These are unlikely to be clarified soon as the UK is far off activating Article 50 of the Lisbon Treaty to negotiate its departure from the bloc.

However, regulatory experts have warned the implications of these changes, unless properly managed, could lead to the UK losing its position as a key entry point into Europe for international companies, while making it harder for UK-based asset managers to recruit global talent and distribute their products in Europe.
Distribution framework

As a member of the European Union, asset managers’ UK-domiciled funds previously enjoyed unrestricted access to the trading block’s single market through their UCITS status.

UCITS, established over two decades ago and now in its fifth iteration, provides a harmonised EU legal framework for marketing and distribution, allowing fund promoters to create a product for the EU as a whole rather than on a jurisdiction-by-jurisdiction basis.

If the UK were to acquire European Economic Area (EEA) status after Brexit, following the path of Norway, it is likely it would still be able to rely on the UCITS EU passport.

However, if the country opts to become a ‘third party’ state, it is likely that a UK-domiciled fund would have to be registered under each EU member state’s local regime in order to be distributed there. This would be a significant blow to the EU as the UK currently houses 12.5% of Europe’s net UCITS assets, according to law firm Ashurst.

Julie Patterson, head of investment management at KPMG, said becoming a member of the EEA would raise questions for the UK electorate over what they actually voted for, as legislation requires EEA members to fund the EU budget and follow its regulations, despite granting no decision-making power.

She said it is now likely that firms which exported UK-domiciled UCITS funds across Europe will have to move or set up funds and management companies in an EU member state to retain passporting rights.

“These companies could continue to service clients, but this approach would result in jobs and tax moving out of the UK,” she said.

“To serve everyone they would have to set up duplicate fund ranges – one for the UK and one for Europe – but the more funds you have, the more costs increase.”

Future direction

However, most fund groups contacted by Investment Week maintained it was too soon to take a firm stance on their future European distribution plans, especially as current rules could be subject to change during the Brexit negotiations.

For example, Hermes IM chief executive Saker Nusseibeh said the company’s EU distribution will not need to change in the short term, as the UK currently remains a member of the EU and subject to the same regulations as before the referendum.

However, he said if rules change as a result of EU negotiations and the company is required to have a presence in mainland Europe, it would look to open an office in a location which is best suited to clients and most competitive for the company.

“Some of the groups looking to expand their operations into Europe already have offices there but are moving first and getting permission early to increase capacity and their presence in these domiciles, so they have options if they have to move their fund services there, should the need arise,” he said.

Andrew Bates and Cillian Bredin, partners at law firm Dillon Eustace, said they do not believe the UK will become a member of the EEA, meaning more firms will be forced to boost their presence in an EU funds centre.