On a cold Wednesday morning in February, the chairmen of the UK’s two largest listed fund managers were called to the British parliament’s upper house to present their vision for the country’s £9tn asset management market after Brexit.
Michael Dobson of Schroders and Douglas Flint of Standard Life Aberdeen were upbeat, telling the House of Lords panel that the UK, already the largest investment management centre in Europe, could become even more attractive once it broke free of EU regulations.
City of London veteran Mr Dobson made the case for a regulatory rule book that was “better, more responsive and quicker” than the existing EU framework, while Sir Douglas told the panel that the UK needed to respond to the “dozen‑plus countries in Europe [ . . . ] looking to see how they can make their financial systems more competitive”.
Their pleas are part of the growing debate among City of London asset managers about the future of the sector after Brexit. With the UK government determined to take advantage of its regulatory autonomy after Brexit, many fund groups want the investment industry to chart its own path to boost its international standing.
“Brexit allows us to become a global leader again,” says Dominic Johnson, chief executive of Somerset Capital Management. “We can be bold and release ourselves from the shackles of having to conform to 27 other countries’ views on financial services.”
However, the UK cannot expect any easy wins. Despite its dominance in portfolio management, the country starts from a relative position of weakness in fund structuring and administration. It also risks alienating international investors if it veers too far from EU practices that are held up as global standards.
FTfm examines the opportunities and challenges for the UK fund sector post-Brexit.
Britain as a global fund hub
The UK has long harboured ambitions to become a base from which international managers set up funds and sell them around the world. However it has historically struggled to compete with Europe’s top fund hubs: Luxembourg and Ireland.
“The UK is Europe’s leading portfolio management centre [but] we haven’t had a domestic fund regime that has been as competitive as other jurisdictions,” says Chris Cummings, head of the Investment Association, Britain’s asset management trade body.
One large barrier is tax. UK funds are taxed domestically, a deterrent for international investors who prefer Luxembourg and Ireland’s tax-neutral structures. The IA made reference to this when it called on the Treasury to create a new fund regime for international investors that is tax-neutral.
A rising number of senior fund executives believe an overhaul of the UK’s investment fund framework could boost its international appeal after Brexit. The EU Ucits framework governs most UK retail funds, but the UK will be able to diverge from this after the transition period ends.
“The UK has the opportunity to think about how to create a simpler regime” that could be exported to other regions, particularly Asia, says Keith Skeoch, outgoing Standard Life Aberdeen chief executive and IA chair.
Mr Johnson says the UK should “take the lead to create a fund structure that is truly transportable and passportable” around the world, targeting countries such as the US, Canada, Hong Kong and Singapore.
But the UK would face an uphill struggle in competing with Ucits, which was created more than 30 years ago and is recognised by investors ranging from Chilean pension funds to Hong Kong banks.
“The Ucits framework works incredibly well and is regarded as an international gold standard,” says Patrick Thomson, CEO of JPMorgan Asset Management in Europe, the Middle East and Africa.
Julie Patterson, asset management regulatory change leader at KPMG, notes that the universality of Ucits has helped the funds to be approved for sale by many national regulators. “If the UK comes up with a new label, it will take a while for other jurisdictions to get used to it.”
Sean Tuffy, head of market and regulatory intelligence at Citigroup, says that the UK would have a better chance of success if it focused on alternative investment funds. By creating a new fund range that rolls back some of the requirements of the EU’s onerous Alternative Investment Fund Managers Directive, the country could attract more alternative managers to its shores, he says.
Boosting the domestic fund market
Industry figures say that giving a boost to the domestic fund market represents low-hanging fruit for the UK government post-Brexit. The portability of Ucits has led many global managers to sell their European funds into the UK, rather than setting up onshore vehicles. More than 8,000 funds from the European Economic Area are currently distributed to UK investors.
This would give managers the opportunity to offer funds tailored to local investors’ needs. One feature that could change is liquidity management, which came under scrutiny following the high-profile blow-up at Neil Woodford’s flagship fund last year.
In the aftermath of Mr Woodford’s downfall, Andrew Bailey, the then head of the UK financial watchdog, was quick to point the finger at the “flawed” and “excessively rules-based” Ucits regime.
Mr Bailey, now governor of the Bank of England, indicated that the Ucits practice of offering investors instant liquidity might come under review after Brexit. Meanwhile, the IA has proposed a new domestic fund structure offering exposure to less liquid assets but with less frequent redemption terms.
However, some executives are concerned that a Treasury proposal earlier this year to allow Ucits funds to continue to be sold in the UK after Brexit may deter managers from setting up UK funds. Jörg Ambrosius, head of Europe, Middle East and Africa at State Street, the US bank and asset manager, adds that the UK would have to offer “concrete incentives” to convince managers to move existing funds from Europe to Britain.
Building a fund-servicing sector
Luxembourg and Ireland’s status as Europe’s leading fund hubs is due in part to their large community of custodians, fund-structuring companies and administrators. About 10,000 people of the 16,000 working in Ireland’s investment industry conduct back-office tasks, according to trade body Irish Funds.
Mr Johnson points to the inefficiency of British managers having to go abroad for fund administration services. “It seems crazy that the UK can’t compete with [Luxembourg and Ireland], and create our own ecosystem,” he says.
Nick Mottram, chair of New City Initiative, a trade body representing boutique asset managers, believes that the creation of a new UK fund structure could help the country to lure fund-servicing jobs from Luxembourg and Ireland.
“Many of these jobs do not necessarily need to be carried out in London,” he says, suggesting that regions of the UK with lower labour and living costs could become fund-servicing hubs. “This could help to stimulate regional job growth, while decentralising fund management in the UK.”
However, a potential stumbling block could be the ever-thorny issue of tax. Mr Johnson suggests the idea of designated UK regions being given special status, inspired by “freeports”, that would allow funds serviced there to be tax-neutral.
Becoming a world leader on ESG
Despite the UK’s ambitions of becoming a global leader in green finance, it appears to have missed the boat on setting standards for investing according to environmental, social and governance criteria.
“With the EU moving full steam ahead with its ESG framework, the window of opportunity for the UK has closed,” says Mr Tuffy.
In addition, many asset managers with European businesses are actively urging the UK to stay aligned with the EU’s forthcoming ESG rules to avoid having to deal with clashing regimes.
“We risk unnecessary cost, complication and confusion in the market if the UK were to diverge from the general direction of travel in which the EU is now headed,” says Ingrid Holmes, head of international policy and advocacy at Federated Hermes, the Pittsburgh-based investment group.
Mr Ambrosius says one way that the UK could differentiate itself is by promoting a more principles-based ESG approach. The UK has taken an early lead in this area through its supervision of banks and insurers, and with groups like the climate financial risk forum.
But Ms Patterson notes that high-level principles are less likely to make a difference to the world of responsible investing than tangible ESG standards, putting the UK at a disadvantage to the EU. “If an ESG label has any chance of being trusted it needs to have definition around it,” she says.