Clamp down on ‘let­ter­box’ en­ti­ties by the EU could help boost Ir­ish funds sec­tor

Irish Independent - Business Week - - BUSINESSWEEK - Julie Edde

IN­VEST­MENT firms may have to move thou­sands of jobs to the Euro­pean Union af­ter reg­u­la­tors said “let­ter­box en­ti­ties” nom­i­nally based in the EU but in re­al­ity run from abroad will no longer be tol­er­ated, lawyers and ad­vis­ers say.

The pro­posal would af­fect UCITS, a type of mu­tual fund domi­ciled in the Euro­pean Union, that hold about €9.1tril­lion of as­sets.

The move could see Lux­em­bourg and Ire­land – ma­jor cen­tres for the sec­tor – at­tract or cre­ate thou­sands of jobs in ar­eas from gov­er­nance to com­pli­ance if UK 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 Euro­pean Se­cu­ri­ties and Mar­kets Au­thor­ity (ESMA) 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 EU.

Post Brexit it would hit the UK, where al­most €1.1 tril­lion of UCITS fund as­sets are domi­ciled, ac­cord­ing to Price­wa­ter­house­C­oop­ers.

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. 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.

“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.”

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.

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.” (Bloomberg)

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