As the UK Government seeks input on issues across both tax and regulation as part of its review of the UK Funds Regime, industry experts suggest it is ‘far fetched’ that the review will significantly increase the opportunities for the asset servicing industry
With many concerned about the competitiveness of the UK’s fund industry in a post-Brexit era, market participants may have taken a collective groan after reading the HM Treasury’s latest call for input on the UK Funds Regime. In its most recent paper, the UK Government seeks input on issues across both tax and regulation as part of its review of the UK Funds Regime amid concerns that more needs to be done to remain competitive in a post-Brexit era.
The review started with a consultation on the tax treatment of asset-holding companies in alternative fund structures, to which the government responded in December 2020. The latest report, ‘Review of the UK funds regime: a call for input’, sets out the scope and objectives of the review, and invites stakeholders to provide views on which reforms should be taken forward and how these should be prioritised.
The overarching objective of the review is to identify options which will make the UK a more attractive location to set up, manage and administer funds, and which will support a wider range of more efficient investments better suited to investors’ needs.
However, industry experts have suggested that the UK’s fund space is at a disadvantage to its European counterparts, especially so in the retail funds space. While the call for input will be welcomed by the UK funds industry, the lack of European marketing passports, exclusion of retail funds and issues surrounding the Overseas Fund Regime (OFR) is a concern for many.
Significant and immediate disadvantages
One area of the report which has been highlighted by those in the industry is section 4.3, which essentially only applies to alternative investment funds.
The section states: “The government has been told by stakeholders that there is considerable potential for the UK to build on the reputation and history of its legal and regulatory systems and enhance its attractiveness to funds sold in high growth international markets.”
It continues: “However, the government has also been told by stakeholders that the lack of passporting rights and access to the EU market means that the UK may not be competitive for retail funds internationally.”
“As a result, 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.”
Patric Foley-Brickley, managing director of Maitland, a global advisory, administration and family office firm, says: “HM Treasury has 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 says it’s “slightly alarming” this is not mentioned until page 21 of the consultation.
He also identifies that compounding this, as the incoming Overseas Funds Regime (OFR) 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.
“This not only puts UK retail funds at a significant and immediate disadvantage to its EU competitors but also, in my view, puts the whole UK domiciled fund industry at significant risk in the medium to longer term,” Foley-Brickley comments.
Indeed, 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.
He 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.
“Once it is recognised that retail funds are not on the table, immediately the scope of the review is significantly reduced and the corresponding opportunity to ‘make the UK the domicile of choice’ is limited to alternative asset classes only,” says Foley-Brickley.
That is not to say, however, that the alternative fund structures in the UK are not in need of overhaul either from a tax and a regulatory perspective, notes Foley-Brickley, and the opportunity to bring about changes that make UK funds more competitive in this respect should be welcomed.
Whether or not this overhaul will result in the UK becoming the domicile of choice is questionable. According to the paper, the opportunities are clear. It is noted that improvements to the funds regime will result in a wider range of more efficient investments, better suited to investors’ needs.
“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,” the government states.
It is also indicated that the growing number of funds located in the UK can also level up the country’s economy. By supporting jobs outside of London, the paper suggests that funds are a major employer of jobs across the UK, with the sector already having a notable presence in Edinburgh, Manchester, Leeds, Nottingham, Bolton, Glasgow, Stirling, Essex, Swindon and Dorset.
Yet, regarding market recognition for vehicles that are most suitable for particular alternative asset types, for example, other jurisdictions have a significant head-start on the UK in relation to having market recognition for vehicles that are most suitable for particular alternative asset types. For example, Jersey and Guernsey for real estate and private equity structures and Cayman, Ireland and Luxembourg for hedge funds.
Burkhard Ober, associate partner at Hume Brophy, comments: “The main challenge for the British fund industry, 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.
Fighting to remain competitive
To become competitive and to steal away some of the fund structuring flow that currently goes to other established jurisdictions, Foley-Brickley explains 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.
Other aspects such as speed to market and a focused campaign explaining these advantages will also need to be considered.
Foley-Brickley suggests HM Treasury’s assertion that this review will suddenly and significantly increase the opportunities for the asset servicing industry is far-fetched.
While the UK has an excellent reputation for providing fund administration and other asset services to the retail funds industry, Foley-Brickley points out that the expertise available in the UK to administer alternative asset funds is significantly more limited.
This is particularly when compared to the established alternative asset fund domiciles who already have the lion’s share of this market.
If the OFR was not to be adopted into legislation, then the 9,000 EU funds that want to continue to market to the UK retail investors would have to set up here immediate effect, and that would create a serious number of jobs, additional revenue, and taxation, as highlighted in the paper.
But unless the UK Government removes the OFR from the Finance Bill in its final reading, the opportunity to do this will have been missed, explains Foley-Brickley.
Meanwhile, Rahul Manvatkar, investment funds partner at global law firm Linklaters, argues that the UK has consistently been “a key global centre for portfolio management expertise”.
However, with the UK out of the EU, Manvatkar says 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.
Manvatkar adds: “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.”
Among these issues, the lack of clarity around delegation and equivalence, for example, is also challenging and not a stable environment for a flourishing British fund industry that needs continental Europe as a funding source and as a client.
Ober highlights: “The good news is that the German Fund Association BVI has proactively pleaded for the continuity in delegation rights, such as fund management and risk management etc. But it will continue to be a constant battle.”
So, what can be done? Ober says: “Look out for allies! London-based asset management companies have to look for better advice, be more engaged and establish a bigger presence in Brussels.”
Meanwhile, 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.”
