In mid-July, Esma, the EU securities regulator, published an opinion paper, suggesting national regulators should take a tougher line on policing the asset management sector after Brexit.
In particular, it zeroed in on “delegation” rules that allow a fund management company registered in one country to outsource its asset management to another place, either within the EU or outside it.
This sounds like pretty arcane stuff. But it is crucial architecture for the European and global asset management industry. Philip Warland, a former Fidelity executive who is now a consultant, reckons about 90 per cent of EU assets under management make use of delegation rules. Most European funds are registered in Dublin or Luxembourg, but the actual fund management takes place globally, with the largest chunk delegated to London.
Anecdotal evidence suggests France is very keen to win more of this business. And when Esma published its paper, the UK industry smelled a rat. Not only is the regulator Paris-based, but the “convergence” agenda, under which the opinion paper was published, is the responsibility of Sophie Vuarlot-Dignac, a seasoned French regulator.
The wording in the delegation section of the document has alarmed some fund managers. “Delegation to non-EU entities could make oversight and supervision of the delegated functions more difficult . . . National competent authorities should therefore give special consideration to such delegation arrangements and be satisfied that their implementation is justified based on objective reasons despite the additional risks which may arise from them.”
In plain language, that could mean at the very least that more risk management functions need to be put on the ground where a fund is registered, or at most that no fund management functions can be delegated outside the EU.
Taken to its logical extreme, this would not only be very disruptive for the asset management industry and the current hubs in the UK, the US and Asia where most of the best fund managers are based, but there would in likelihood be a second-order magnetic effect on the investment banks, whose traders and salespeople would need to follow their fund manager clients to parts of mainland Europe. If that happened, those apparently doom-mongering post-Brexit job-move predictions might start to look conservative.
According to Efama, the European fund management association, total assets under management in Europe last year were €22.8tn, equivalent to almost a third of the global total. More than 4,000 asset management groups are registered in Europe directly employing 100,000 people, nearly 40 per cent of them in the UK. Across the EU, close to half a million people are in jobs that service the asset management industry.
All of the above is a worst-case interpretation of a non-binding document. Eyes are now turning to the European Commission, which is due next January to review the AIFMD, a directive that covers “alternative” asset managers such as hedge funds.
It may also review the directive on Ucits — the rules on mutual funds based in the EU. Even if the commission did decide the delegation rules should be tightened, any changes would need to go through the full EU process at the European Parliament and European Council. Fund experts believe Ireland and Luxembourg, which have prospered as global administration hubs for the industry thanks to the current rules, would reject calls for change, no matter how hard France pushes. [...]
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