The UK’s asset management industry is the largest in Europe and the second largest globally. UK asset management firms – from large organisations to small and medium-sized enterprises (SMEs) – already manage approximately £11trn (€12.3trn) of assets for UK and global clients.
The Financial Conduct Authority (FCA) and the government support the UK’s position as a world-leading centre for asset management. It is encouraging that, in its February 2023 discussion paper focused on updating and improving the UK’s asset management regime, the FCA recognised that “the global nature of the industry, supported by effective regulation based on strong international standards, can benefit firms, consumers, markets and global economies”.
This dovetails with the attitude adopted by the government in its review of the UK funds regime. The government is committed to bolstering the UK’s position in relation to key components of the industry – that is, portfolio management and fund administration. The government’s goals are to make the UK a more attractive location in which to set up, manage and administer funds, and to support a wider range of more efficient investments, better suited to investors’ needs.
However, post-Brexit there has been an important and unfortunate fund access gap for many UK firms, especially SME asset managers, in the global map. UK managers have lost their automatic passporting rights into the European Economic Area (EEA).
As a result, firms have been hampered in their efforts to market fund products to EEA pension funds and other professional investors. In addition to the problems that this causes for UK firms, it also disadvantages EEA investors in that they are deprived of investment returns and diversification opportunities. Access to new pools of investor capital is essential for achieving both UK and EEA net-zero goals, investment in long-term productive assets and economic growth.
While the EU could take steps to correct this, it has yet to do so. Existing EU law allows the European Commission to make ‘equivalence decisions’ in relation to non-EEA states for the purposes of alternative funds regulation. Such decisions would be made where the European Securities and Markets Authority (ESMA) considers that the relevant non-EEA state has a regulatory regime for alternative funds which is equivalent to the EU’s regime. Managers in a non-EEA state which benefits from an equivalence decision would be able to access EEA professional investors. The European Commission has still to make any equivalence decisions under alternative funds legislation – even though ESMA has already in principle indicated there were no significant obstacles to extending fund access rights to Canada, Guernsey, Japan, Jersey and Switzerland.
The UK is also waiting to see whether it will be granted an equivalence decision. Andrew Bailey, Governor of the Bank of England, has remarked that “it would be reasonable to think that a common framework of global standards combined with the common basis of the rules – since the UK transposed EU rules from the outset – would be enough to base equivalence on global standards”.
On account of the fund access gap, UK managers are having to incur the substantial costs of establishing and operating fund structures in the EEA in order to continue marketing to EEA investors and managing EEA funds. This favours large managers that can afford to operate such structures – particularly with European Commission planning tougher substance requirements for managers operating within the EEA.
The FCA quite rightly wants its “rules to interact effectively with the requirements that firms are subject to in other jurisdictions”. The FCA has expressed in the discussion paper that it does “not want to create unnecessary complexity for firms operating their businesses internationally”. “Other jurisdictions” and “internationally” should obviously include the EEA.
Building on the welcomed pragmatism that is now influencing UK-EU relations – demonstrated, for example, with the ‘Windsor framework’ deal regarding Northern Ireland and reports that the EU is now willing to sign a memorandum of understanding on UK financial services – UK and EU regulators and governments should consider facilitating UK asset managers being entitled to access EEA investors without having to establish fund structures in the EEA. By way of context it is worth noting that, in the case of EEA managers wishing to retain market access to UK professional investors, managers may utilise the UK private-placement regime and financial promotion rules, and so there is no need for EEA managers to establish fund structures in the UK.
Accessing EU investors has never been more complex and costly for UK and other non-EEA managers. Current restrictions hold the industry back by creating unnecessary complexities for UK asset managers wishing to access EEA investors. Let’s find a solution that will plug this fund access gap.