Urging a “layered approach” to funds regulation following Brexit, the AIC said it “recommends that consideration be given to abolishing the AIFM Directive in its entirety for providers not marketing funds into the EU”.
Although EU laws are likely to remain in place throughout the transition period, in order to ensure regulatory stability and consumer protection, the AIC urged the UK government not to take a ‘one-size-fits-all’ approach to regulating the funds industry once the exit is complete.
The UK regulators should have an opportunity to set UK-specific rules for those funds and providers of asset management providers that service solely non-EU customers. According to the AIC, these providers make up some 80 percent of the UK’s asset management activity.
In a report written in November 2016 and released in January 2017, the AIC said: “Applying the AIFM Directive to UK providers after Brexit will mean that the UK manager of a non-EU, non-UK fund which is entirely held by non-EU investors, would potentially have to comply with the full EU rulebook.”
“The justification for applying the rules in this way, rather than complying with the regulatory obligations imposed according to UK requirements and in the jurisdiction of the fund, is unclear.”
The association made recommendations to streamline UK funds regulation, with a focus on AIFMD. Reforms to the directive could be made to abolish private equity requirements, reform depositories and change the scope of exemptions that apply.
However, the AIC recommended “a more ambitious approach”, in abolishing the directive altogether, saying it does not provide “any material regulatory benefits”.
“The UK would then be free to introduce specific, targeted measures, following consultation, if any were considered necessary,” the report said.
“Radically reforming or abolishing the AIFM Directive would reduce unnecessary costs, help deliver keener product pricing for investors and increase the global competitiveness of the UK as a location for funds and asset management.”
The recommendation to scrap AIFMD comes amid calls from the AIC to change UK rules to better meet domestic consumer, regulatory and political objectives.
Currently, UK fund managers have to comply with EU obligations, whether or not they market to other member states. Many UK investment companies have no non-UK investors.
Companies that provide services to EU investors could then opt in to comply with EU rules, taking a commercial decision on an individual basis.
Smaller businesses based in the UK may conclude that the costs of compliance with EU rules do not “provide compensating benefits”.
“The opt-in approach will ensure the UK’s regulatory framework matches costs with benefits and will make the market more competitive.”
UK service providers already have to comply with various regulatory obligations, with each item creating the need for separate structures and systems. An opt-in model would keep these structures separate, “except that it offers the opportunity for a streamlined, more proportionate approach for providers not servicing EU investors”.
Ian Sayers, chief executive of AIC said: “Brexit should allow UK policymakers to deliver better targeted and more proportionate regulation. Ultimately, this will mean lower costs and greater competition for the funds sector: a ‘Brexit dividend’ delivering long-term consumer benefits.”
“If the government takes this approach they will be able to maintain investor protection standards while also taking steps to maximise the competitiveness of the funds sector. As well as benefiting investors this will support the long-term future of UK fund management and its capacity to create jobs, invest in UK business and contribute to tax revenues.”