(Bloomberg) -- Investment firms may have to move thousands of jobs to the European Union after regulators said “letterbox entities” nominally based in the EU but run from abroad will not be tolerated, lawyers and advisers say.
The proposal would affect UCITS, a type of mutual fund domiciled in the European Union, that hold about 9.1 trillion euros ($10.3 trillion) of assets. The European Securities and Markets Authority said in May that passports to sell funds -- effectively, a stamp of approval allowing fund managers to offer a product globally -- should be rejected unless major decisions are made by management based within the bloc.
ESMA, which could publish a second take on its opinion this week, said the guidance was prompted by Brexit as it seeks to avoid a race to the bottom in oversight standards. While almost 1.1 trillion euros of UCITS fund assets are domiciled in the U.K., according to PricewaterhouseCoopers, the implications may spread beyond the City of London. UCITS products are often domiciled in Luxembourg and Ireland, but their fund managers can be based anywhere in the world to focus on local markets.
“It could be a threat to the viability of UCITS at the global level,” Dan Waters, managing director at fund management association ICI Global, said in an interview. “There are trillions of euros, dollars, pounds of investments going back and forth right now” through the products, and there's a chance that the regulator “could inadvertently build barriers around that.”
Brexit Impact
ESMA, which does not have legislative powers, published the opinion as part of an effort to unify European regulators' approach to fund registration following Britain's vote to leave the EU. Since the Brexit vote, several nations have said they're keen to grab slices of Britain's financial industry.
Luxembourg and Ireland could attract or create thousands of jobs in areas from governance to compliance if U.K. firms have to re-register within the EU, according to John Skelly, a Dublin-based principal at Carne Group, an adviser that helps set up UCITS funds.
The guidance on UCITS -- an acronym for Undertakings for the Collective Investment of Transferable Security -- is the first time ESMA has said that a certain amount of fund activity should be based in the EU, but it so far lacks specifics on what functions will have to be done in the bloc, lawyers say.
“The opinion seems to overreach” directives around fund regulation, said Simon Currie, a London-based partner at legal firm Morgan Lewis who advises clients on setting up operations in the EU. “It's quite clear in the directives that you can delegate decision-making in connection with portfolio management to a third country.”
The ESMA guidance comes as fund managers in Britain, the third-largest domicile for the products after Luxembourg and Ireland, face decisions about establishing affiliates in the EU. An authorization application in a new jurisdiction typically takes nine months to submit, meaning the firms have until about June next year to submit the plans based on the current Brexit timetable. Fund managers could also opt to abandon UCITS and opt for the less developed passporting regimes in Asia or South America, ICI Global said.
To read a QuickTake on passporting rights, click here
ESMA's guidance assumes the U.K. will become a so-called third country for regulatory purposes following its exit from the EU, the regulator said by email, meaning funds registered there will have to set up affiliates in the bloc if they wish to continue using the UCITS passport. The regulator also said it didn't go beyond its powers by issuing the opinion.
When ESMA releases its refined opinion, it should help show how many more people investment firms will have to employ in the EU after Brexit if they want to delegate management of the funds to an entity in the U.K., said Matt Huggett, a partner at legal firm Allen & Overy specializing in asset management.
Still, the references to letterbox entities in the earlier guidance “looks like an opportunistic move to attract jobs to particular jurisdictions,” Waters said. “That looks to us like protectionism or regulatory nationalism."
To contact the reporter on this story: Julie Edde in London at jedde2@bloomberg.net.
To contact the editors responsible for this story: Neil Callanan at ncallanan@bloomberg.net, Keith Campbell
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
