On-going high-level talk about reform of AIFMD and UCITS is generating nervousness in the European asset management industry. Was the 18 August letter on this topic from ESMA to the European Commission really about seeking to promote efficiency, or is it more a post-Brexit reckoning that could upset current successful arrangements?
‘Potentially transformational’, is how Chrystelle Veeckmans, Partner in Asset Management with KPMG Luxembourg described the suggestions contained in the European Securities and Markets Authority (ESMA) letter when she spoke last month to Investment Officer. ‘Looking to fix something that has never been an issue,’ was the more acerbic comment of from CSSF director general Claude Marx, speaking at the ALFI Rentrée online conference held from 14-18 September. Concerns about the future of the widely supported current regulatory regimes was expressed by numerous panelists during this event.
The ESMA letter featured 19 suggestions for reform, some of which are uncontroversial attempts to clean up procedures. However most prominent were passages apparently calling into question the delegation model which underpins much of the European regulatory framework. How EU-based funds should delegate their portfolio management activity inside and outside the EU has been an on-going topic for the bloc’s lawmakers for decades. The argument for current arrangements is that EU-based investors are well served when funds can choose experts located in global portfolio management hubs. The result has been a growing EU cross-border fund industry using AIFMD and UCITS rules, often based out of service hubs in Luxembourg and Dublin.
Remote supervision
Michael Collins, Director of Government Affairs at the UK insurer Prudential and speaking at the ALFI Rentrée, noted Esma’s letter has two main objectives when it came to cross-border fund administration and distribution. “Delegation ensures specialised tasks are carried out by specialists which is in the interests of customers, but regulators have a legitimate desire to understand and control all the links of the asset management value chain,” he explained. However, he then went on to add: “it remains to be seen why a change is necessary and hopefully this will be explained during the AIFMD reform process.”
Sheila Nicoll, Head of Public Policy at Schroders Investment Management said she hoped that “when the political disagreement over Brexit dies down the good will that is on-going between regulators will continue.” Indeed if anything, “recent evidence suggests there is less need for physical and geographic presence matters when it comes to oversight, as the industry adaptation to Covid-19 has shown this does not matter,” she noted.
A political football?
“I agree from an operational point of view,” said Collins speaking about remote supervision. Yet he saw political considerations at play: “there is a part of this debate about the acquisition of high value activities.” Now that the UK government is no longer able to defend the interests of mainly London-based asset managers, the political balance has changed within ESMA, the European Commission, the European Parliament, and the European Council. Indeed talk about changing asset management delegation arrangements has been on-going since the 2016 referendum resulting mandating that the UK will leave the EU.
It remains to be seen whether these noises are part of a genuine desire for change, or are an element in the on-going exit negotiations. Few analysts are willing to make clear predictions about UK government’s plans, with some even suggesting the talks could go beyond 31 December when the transition period is due to end.
It might be of relevance that the UK government is the sole arbiter on the UK side of the contents of the final trade deal between the UK and the EU. “MPs are not guaranteed a debate or vote on the ratification of any future relationship treaty,” notes a paper by the UK House of Commons Library*. When parliament approved the European Union (Withdrawal Agreement) Act 2020 they delegated full responsibility to the government. So Boris Johnson could opt for a “no-deal” scenario, but he might wish to minimise economic disruption by choosing to align as closely as possible to EU rules. This might have implications for the debate around AIFMD and UCITS reform.
Some progress
“The UK and EU have missed the deadline to declare equivalence for the EU market of UK asset management activity post Brexit,” noted Martin Parkes, Managing Director, Global Public Policy at BlackRock. There are two main aspects to this, with asset management delegation sitting separately from equivalence rules. In other words, the ability of EU-based funds to outsource asset management to non-EU countries, and the right of UK funds to be sold into the EU, are two different matters for debate.
Sheila Nicoll noted that ‘the UK has cleared that EU asset management will be fully equivalent in the UK market from day one.’ Thus EU UCITS and AIFs will be able to be sold into the UK at least until 2023 if they perform some extra basic regulatory reporting tasks.
As this debate plays out, Collins gave a warning: “the more barriers there are for asset managers, this would mean investors have less choice, and this needs to be considered in Paris [where ESMA is HQed] and Brussels.” Nicoll agreed, adding that: «clamping down on delegation to the UK would have an impact on delegation to the US and Asia.” So it still remains to be seen if the fund industry will be caught in the cross-fire of the on-going Brexit saga.
*Constitutional implications of the Withdrawal Agreement legislation, House of Commons Library, Briefing Paper Number 08805, 20 February 2020