There could be a significant opportunity for UK asset managers to launch differentiated investment products from those regulated under European Union rules after the country leaves the trading bloc according to Brown Brothers Harriman.

Carla Jane Findlay-Dons, senior vice president at BBH, said on the bank’s On The Regs blog that the first speech from Nausicaa Delfas, executive director of international at the Financial Conduct Authority, showed that the UK regulator has shown a thoughtful approach and sensitivity to the financial services industry’s preparations for Brexit.

Here is Nausicaa Delfas @TheFCA speech at @business in full https://t.co/HnbaFn11WW pic.twitter.com/4GznnN9Zcl

— TheCityUK (@TheCityUK) July 19, 2018

“If the FCA does indeed seek to review and amend the existing EU regulatory framework there will be significant opportunity for UK asset managers to launch differentiated investment products from those regulated under EU rules,” added Findlay-Dons.

She continued that Delfas confirmed a commitment to ensuring passporting will continue throughout the transition period even though the FCA can only grant permissions to access the UK market.

Passporting allows any financial services firm authorised in the EU operate across the 28 member states without further regulatory approval. However UK firms will not be able to use a passport to sell financial services in the remaining 27 EU member states after Brexit. Findlay-Dons explained that if a UK manager wants to sell a fund into the EU, they would need to ensure they had a separate permission as a third-country entity, not an EU reciprocal member state.

“This is a positive sign for the industry because cross-border funds rely on passporting,” said Findlay-Dons. “Any restriction in passporting prevents managers from marketing cross-border and would force them to create a two-regime set of requirements.”

She added that Delfas made it clear the FCA will seek equivalence from day one. Third-country equivalence allows financial firms from outside the EU to access the trading bloc because the European Commission deems that their home jurisdiction has comparable regulation.

“However, Delfas also suggested they will evolve their regulatory framework, pushing the door wide open on a competitive jurisdictional approach to compete with the rest of the EU,” said Findlay-Dons. “We expect the FCA plans to try and make it more attractive to do business in the UK and seek the same exposure and investor base from the UK with a unique UK product, fund, or service.”

Sean Tuffy, head of market and regulatory intelligence, custody and fund services, EMEA at Citi said it his 2018 Mid-Year FinReg Outlook that market participants should be worried about the EU rethinking third-country equivalence to avoid unduly benefitting the UK.

From @Citi’s 2018 Mid-Year Finreg Outlook: 4 Things to Watch – https://t.co/mvuxAiupPZ pic.twitter.com/DU6A7wCHLv

— FinReg Alert (@FinRegAlert) July 27, 2018

Tuffy said the EU will likely delay any third-country equivalence decisions until after Brexit negotiations are complete.

“This mean that decisions like the extension of the Alternative Investment Fund Managers Directive passport to third countries will remain on hold for the time being,” Tuffy added. “In the longer term, it could mean the end of the third-country equivalence concept all together.”

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┻┳| •.•) The EU Commission
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— Sean M. Tuffy (@SMTuffy) July 27, 2018

Similarly, Tuffy noted that some EU policymakers have called for changes to UCITS rules in order to restrict the delegation of regulated funds outside the EU. Delegation allows fund management activities, including portfolio management, to be performed outside the UCITS fund’s domicile, which has benefited the UK as the largest asset management hub in Europe.

“Incorporating delegation restrictions requires changes to the UCITS framework, which isn’t an easy task,” said Tuffy. “Given this, the debate may stretch into 2019. Nonetheless, given the global implications of the debate, it’ll be a key issue that the asset management industry will be tracking.”

Tuffy warned that asset managers need to start initiating their Brexit plans as the deadline of April 2019 is approaching, despite the uncertainty over any deal.

“For many, at the very least, this will mean establishing or strengthening substance with the EU,” he said. “For others, particularly those selling UK funds into the EU, it may mean launching new EU-domiciled funds.”

Sandy Nairn, chairman of Templeton Global Equity Group and chief executive of Edinburgh Partners, wrote on Franklin Templeton Investors Beyond Bulls and Bears blog there there are equal chances of a “fudge/delay,” a “hard Brexit” and “remain.”

Brexit: Are Markets Underestimating the Chances of the UK Not Leaving? Templeton Global Equity Group Chairman Sandy Nairn investigates. https://t.co/R22b1etDfk

— Franklin Templeton (@FTI_Global) July 27, 2018

“In our view, at the moment the soft Brexit or fudge option is not a solution as much as a way of avoiding the hard choices,” said Nairn. “It looks increasingly likely that at some point, this realisation will be brought into stark relief.”