The implications of Brexit could mean UK retail funds face a “significant and immediate disadvantage” compared to its EU competitors, according to Patric Foley-Brickley, managing director of Maitland, a global advisory, administration and family office firm.
This follows the announcement that the UK Government is seeking input on issues across both tax and regulation as part of its ‘Review of the UK funds regime: a call for input’ amid concerns that more needs to be done to remain competitive in a post Brexit era.
Section 4.3 of HM Treasury’s report essentially only applies to alternative investment funds. Within this segment, it states the “the government has been encouraged to focus on proposals to enhance the UK’s reputation as a location for alternative investment funds (AIFs), for which the challenges around market access faced by retail funds do not apply to the same extent”.
It is suggested that retail funds will be excluded because there is no ability for UK funds to be passported outside of the UK as there was prior to Brexit.
Foley-Brickley highlights that it's “slightly alarming” this is not mentioned until page 21 of the consultation.
He also identifies that compounding this, they are currently bringing in the Overseas Funds Regime (OFR) which will allow 9,000 EU funds to be freely marketed in the UK but without the reciprocity would allow UK domiciled funds to be similarly distributed in the EU.
In addition to putting UK retail funds at a disadvantage, Foley-Brickley suggests this it also puts the whole UK domiciled fund industry at significant risk in the medium to longer term.
It has been suggested that remaining competitive will be extremely difficult. For example, a funds management group wanting to market into the UK is more likely to pick Luxembourg or Dublin to access a wider spread of markets for distribution.
Foley-Brickley explains that this is because a fund set up in Luxembourg or Dublin can be marketed into the UK and Europe whereas a fund set up in the UK will be marketed to UK investors only.
Despite these challenges, HM Treasury states: “With the correct fund structures, tax regime and regulatory environment, we can unleash the investment into productive and green technologies that will enable us to meet this government’s ambitious and pioneering commitment to net zero by 2050.”
It is also indicated in the paper that the growing number of funds located in the UK can also level up the UK’s economy.
Burkhard Ober, associate partner at Hume Brophy, comments: “The main challenge for the British fund industry, in my opinion, will not lie on the regulatory side or on bonus and tax questions. Yes, Britain will do a lot in these areas to enable the fund industry to flourish, but it doesn’t tackle the main question.”
“The major problem will be the brain drain. London benefited a great deal by offering a very competitive work environment for Europeans (young ones primarily, but also senior managers) and the mix of Europeans and people from around the world was a big lure.”
“This is going to become more difficult — many Europeans have left London or are planning to do so. This is a damaging factor for the industry,” Ober affirms.
To become competitive and to steal away some of the fund structuring flow that currently goes to other established jurisdictions, Foley-Brickley explains that the UK will need to do more than establish parity from a tax or regulatory perspective — they will need to be able to demonstrate a distinct advantage over their competition.
Rahul Manvatkar, investment funds partner at global law firm Linklaters, comments: “The UK has consistently been a key global centre for portfolio management expertise.”
“However, with the UK out of the EU, there is a recognition that it will need to do more to compete with the other global financial centres, especially those in Europe, and that includes enhancing its reputation as an attractive hub to set up and administer funds.”
“There will inevitably be some challenges ahead, including the lack of European marketing passports, but the Treasury’s call for input will be welcomed by the UK funds industry who will be only too aware of the need for the UK to remain competitive in the post-Brexit era,” Manvatkar adds.
The review invites stakeholders to provide views on which reforms should be taken forward and how these should be prioritised by 20 April 2021.
Foley- Brickley concludes: “There is no doubt that the institutional funds regime in the UK needs a significant overhaul both from a tax and a regulatory perspective, but the idea that the UK is going to suddenly become the fund domicile of choice for alternative asset classes as the result of this consultation is pushing the boundaries of credibility.”
Look out for 259 of Asset Servicing Times where industry experts will discuss this subject further.
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