EU Warned On Changes To Fund Delegation

Shanny Basar

Fund managers have warned that proposals from the European Commission on changing the review of existing and future delegation arrangements could threaten the success of the industry in Europe.

The current delegation model in the European Union allows assets to be managed in local markets while funds can be offered across borders, leading to the success of the UCITS and AIF brands not just in Europe, but around the globe.

The asset management and investors council of the International Capital Market Association today published a statement on fund delegation, stressing that delegation allows UCITS and AIFs to be recognised in over 75 jurisdictions including Asia and South America. This allows European savers to benefit from fund management expertise around the globe while enjoying the same level of investment protection as within the EU.

The European Commission issued proposals in September last year to reform the European Supervisory Agencies and give them power to issue opinions on delegation arrangements which could lead to an unwinding of existing approved delegation arrangements.

“The proposal to review the European Supervisory Authorities gives the European Securities and Markets Authority the power to issue opinions on existing and future delegation arrangements,” said the letter. “ICMA’s asset management and investors council believes this proposal could threaten the success of the European asset management business.”

The council continued that the delegation frameworks of UCITS and AIFMD, the regulation covering alternative investment funds, are especially effective as they enable investment funds to delegate functions such as custody and portfolio management whilst being subject to strict control, oversight and accountability by those funds’ national regulator in compliance with EU rules. The letter added that scope of the proposed ESAs’ review provision is not clearly defined and raises additional concerns among market participants.

“Giving ESMA the power to publish recommendations which would withdraw existing third country delegations already allowed by national competent authorities would lead to significant practical problems and would destabilise the sound portfolio management of the relevant funds, if it should lead to the repeal of delegations already allowed,” added ICMA.

Adrian Whelan, senior vice president of regulatory intelligence at Brown Brothers Harriman, said in a blog On the regs that a primary consideration for any asset manager assessing whether to relocate in the EU will depend largely on the nature of delegation that will exist after Brexit. A reduction in allowable delegated activity will require an increase in EU-based resources.

“The industry has been particularly resistant to altering delegation requirements, stating the current system works,” added Whelan. “Meanwhile, some policymakers remain keen to ensure as many activities as possible are retained within the EU.”

Whelan continued that in recent weeks it has become clear that there is little consensus in Europe on the proposals.

“What is clear is that there is a trend of UK asset managers setting up an EU presence to ensure adequate regulatory substance,” he added. “Dublin and Luxembourg are seeing a steady stream of asset managers, UCITS management companies, and AIFMs and are emerging as two important EU financial centers.”

He also warned that  asset managers should not rely on temporary permissions to continue operating in the same way. The UK government has said that EU companies wishing to continue operating in the country in the transition period through the temporary permission regime, but the EU has not yet confirmed they are willing to offer the same terms. The UK leaves the EU  29 March 2019 but they have agreed a transition period that lasts under 31 December 2020.

“Given the significant level of uncertainty as to both the nature and timing of a Brexit deal, firms should take decisive action now to ensure seamless business continuity whichever way the ultimate agreement leans,” said Whelan.

The Alternative Investment Management Association, the global representative of alternative asset managers, said yesterday in a position paper, Brexit and Alternative Asset Managers: Managing the Impact, that the UK should seek to sign cooperation agreements with each of the 31 European Economic Area member states. The European Economic Area includes the 28 EU member states and Iceland, Liechtenstein and Norway, allowing them to be part of the EU’s single market. Switzerland is not an EU or EEA member but is part of the single market.

Around 85% of European hedge fund assets are managed from the UK according to AIMA. However, after Brexit the UK will lose the ability to passport financial services across the EU affecting UK investors who have invested in EU hedge funds and vice versa.

Jack Inglis AIMA CEO said: “This is a time of uncertainty for the UK’s alternative investment management industry, and our members continue to devise and implement a variety of contingency plans.”

The paper added that the AIFMD does not contain any provisions dealing with the withdrawal of a member state so there is uncertainty over how existing relationships which have developed under these arrangements will continues to operate. For countries not covered by the AIFMD, firms will have to meet the national law of each EEA member state.

The paper said that if there are no agreements in place before the formal withdrawal of the UK from the EU, it is likely that existing UK hedge funds will have to stop marketing in the trading bloc and stop directly managing any EEA funds until they have re-registered with the competent authority of the member state under the applicable national law.

The report noted that the EU has already signed memorandums of understanding with third countries for alternative funds that could be used with the UK after Brexit.


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