08 October 2017

Financial Times: Europe’s national regulators clash over delegation

National regulators in Europe have clashed over whether asset managers should face more stringent scrutiny after Brexit, as concerns mount that the UK’s vote to leave the EU will trigger upheaval in the fund industry.

Luxembourg’s financial watchdog, the Commission de Surveillance du Secteur Financier, warned Brussels against introducing stricter regulation of mutual funds on the back of Brexit, arguing this could cause irreparable damage to the EU’s position as a leading centre for asset management globally.

Its warning came after the European Commission, the EU’s executive arm, put forward proposals to beef up the powers of the pan-European financial watchdog, the European Securities and Markets Authority.

But a spokesperson for Luxembourg’s watchdog said: “The fund industry has remained remarkably resilient and stable during the financial crisis, and there is no immediate justification to reconsider the current system, which proved to be efficient.”

At the heart of the issue is so-called delegation, which allows an asset manager to set up a fund in one EU country and outsource the portfolio management to investment staff in another country. The funds can then be sold across the bloc, under the Ucits framework.

Over the past three decades, Luxembourg and Ireland have become the EU’s top hubs in which to base mutual funds, while investment decisions are typically taken in London, Paris, Frankfurt or elsewhere in the world.

Around 90 per cent of the EU’s assets under management use delegation rules, according to industry estimates, with London benefiting most from the regime.

But with the UK set to leave the EU, there is greater attention on whether current rules are strict enough. The fear is that, because of Brexit, large chunks of assets regulated in the bloc would be run from a non-EU country, with asset managers having only a token presence in an EU country.

In July Esma hit out at the establishment of “letterbox” entities, which employ only a few people, in European countries. It believes national regulators should take a tougher line on policing the asset management sector.

Some have argued the Esma opinion clarified existing rules, but others warn it is a land-grab by countries such as France, which are keen to attract more asset managers to Paris.

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