Funds part of the solution on recovery & ESG
Finance Minister Pierre Gramegna noted that while the financial sector was at the root of the 2008 crisis, “the fund industry is part of the solution for recovery after the pandemic.” He added: “funds and EU regulation have proved extremely resilient in this crisis.”
For the climate crisis too, he noted with satisfaction that around 80% all sustainable funds are based in Europe, and that with SFDR and the green taxonomy “I hope that we will have a global standard.” He also mentioned the government’s policy of enabling funds to reduce the subscription tax in line with the extent to which they invest in green assets. He favours a gradual approach as “asset managers need time to adjust as we do not want to have an issue of stranded assets which might be a problem for financial stability.”
Current Brexit challenges
A panel on Brexit focused on the current arrangements for the flow of funds across the English Channel, and future prospects. There are two main questions to consider: product rules (i.e. which funds can be sold cross-border) and licencing requirements (about who has the right to market a given fud in the UK or the EU). Previously these flows were covered by EU “passports”.
How to sell into the UK
For EU managers selling to the UK, Phil Bartram, partner with UK fund services firm Travers Smith noted the on-going temporary fund permission regime is due to be extended for five years. This would allow funds to be governed under the same rules as pre-Brexit. However, for funds that missed this window of opportunity, there are ways to keep selling to institutional investors, “but it makes it very difficult to reach human investors, irrespective of their net worth or sophistication.”
“For a fund that didn't register before the end of the fund permission deadline, all EU funds, whether they're a UCITS or an AIF will be treated as if they were alternative investment funds for UK retained AIFMD purposes,” Mr Bartram said. This requires registration under the UK private placement regime, which he says is a relatively quick and simple process, but does require extra reporting to the UK regulator, as well as the CSSF for a Lux fund. Moreover, the reporting details may differ. Care also needs to be taken not to arrange deals in the UK, as that could trigger a requirement for a UK marketing licence.
Potential EU to UK outlook
However, the UK government is working on fresh proposals (called an “overseas funds regime”) to make it easier for EU funds to reach retail investors in the UK. However, politics could intervene in this process. Rupert Rossander, general counsel with the asset manager Invesco noted the UK government “is going to be given powers to impose top up requirements to close the gap between any Luxembourg rules and any UK domestic rules that emerge in the future.” Then after that the fund will have to apply to the UK regulator.
Options for UK-based asset managers
Going in the other direction, UK funds can register under national private placement regimes in EU countries, just as US funds do at the moment. Otherwise “they need to consider setting up a Luxembourg vehicle or an Irish vehicle with a Luxembourg or an Irish manager, and then effect delegation of portfolio management to the UK,” noted Mr Bartram. However, he said “the bigger issue is the role of UK based investor relations professionals who have all of their investors in EU markets,” he added. It remains to be seen how regulators in each country will view these relationships.
UK to EU rules remain unclear
Mr Rossander agreed: “it's very challenging because the law in this respect is far from clear.” He said the fund advocacy group Invest Europe has opened a discussion with ESMA around this. “There will probably be pressure for US managers to choose a hub in the EU, rather than – as they have done historically – choosing London as a marketing base for EU clients,” said Mr Wigny.