Britain’s exit from the European Union may raise the cost of distributing funds in the region, force foreign asset managers to rethink their European strategies and threaten the possibility of a Stock Connect between China and the UK.
Investment funds can be passported between member states, allowing asset managers with operations in Britain to sell funds into the EU cheaply and efficiently. Ucits is the most common structure for funds within Europe.
In the absence of these passporting arrangements, asset managers might need to set up additional offices in continental Europe, and it’s likely that the cost of doing this would be passed on to the end investor, said Peter Westaway, London-based chief economist and head of investment strategy for Europe at US fund house Vanguard.
Brexit will certainly have an impact on UK-domiciled funds, as it will require a new set of rules for distribution of such products within the EU, said Jessie Lam, head of European business at E Fund Management (HK), the offshore arm of China’s E Fund.
Lam said the UK might adopt a model similar to that of Switzerland, which is not part of the EU but has various bilateral agreements with EU members. Or it may be that Britain will simply switch to using Cayman Islands structures rather than Ucits, she added.
This is all conjecture, she noted, but there will be a two-year period before Brexit occurs, which should provide time for UK-based and Asian asset managers expanding into Europe to review their strategy and consider where to domicile funds. Some may well put on hold any plans of expanding fund distribution in the region, suggest market observers.
Asian managers should go back to “the basic questions” when formulating a distribution strategy for Europe, said Lam: Who are their target clients – institutions or retail? Which types of institutional investors are they targeting? Where are they? Which investment vehicles will be sold – exchange-traded funds or traditional Ucits?
Lam said the impact of Brexit would not be significant for E Fund (HK) as the firm mainly targets institutional clients and managed accounts. The firm already has a Luxembourg-domiciled Ucits fund being sold in the UK, Sweden and Italy, and is preparing to passport it to Switzerland as well, she added.
Stewart Aldcroft, Hong Kong-based senior fund adviser at CitiTrust, said Asian managers expanding fund distribution in Europe would need to set up a Luxembourg or a Dublin fund – this hasn’t changed.
However, Brexit will undoubtedly mean less efficient fund distribution in Europe, he noted. If they set up a product in Luxembourg, it may mean they won’t be able to market it in the UK, as they can now, but the situation remains unclear, noted Aldcroft.
Another issue is that London is in talks with China about setting up a Stock Connect similar to the equity-trading link between Hong Kong and mainland exchanges. The UK may have to prove that it is still worth dealing with in this respect, said Aldcroft.
On the other hand, Brexit means firms will not have to worry about rules such as the Alternative Investment Fund Managers Directive when selling into the UK market, he noted.
Ultimately, however, the UK is unlikely to drastically shift away from the EU regulatory framework, given that regulations are becoming more globalised and consistent, said Keith Pogson, senior partner in EY’s Asia Pacific financial services division
“I do not expect to have massive changes [in regulation],” he noted. “It is highly likely that the UK would maintain the framework.”