Brussels is exploring whether or not to limit the chance for hedge funds to be managed from abroad monetary centres such because the Metropolis of London, reviving an concept that UK asset managers see as an existential menace.
The European Fee included questions on a attainable tightening of the principles governing hedge funds in a session paper printed on Thursday, choosing up on strategies earlier this yr from the bloc’s prime market regulator that “delegation” of fund administration must be extra clearly restricted in response to Brexit.
A apply on the coronary heart of world funding administration, delegation permits managers to base and promote funds within the EU, whereas outsourcing funding choices to monetary centres such because the UK, which can grow to be a so-called third nation on the finish of the Brexit transition interval.
Current EU guidelines say that delegation must be for clear enterprise causes and never undermine the effectiveness of supervision by nationwide regulators, however don’t set prescriptive limits.
The session doc asks if the bloc ought to go additional, for instance by setting “quantitative” limits on delegation or establishing an inventory of “core or important features” that must be carried out within the EU.
“What’s regarding is that the EU is utilizing Brexit as an excuse for altering worldwide norms,” mentioned one UK fund administration government. The individual added that the push to tighten the delegation guidelines was a politically motivated manoeuvre geared toward forcing funding teams to shift portfolio supervisor jobs — the sector’s most “high-profile, worthwhile features” — to continental Europe.
The fee doc additionally asks whether or not motion is required to clamp down on “letterbox entities” — shell firms that take orders from international delegates — and whether or not totally different guidelines are wanted relying on delegates’ location with the intention to safeguard investor safety.
Whereas Brussels insists it’s not prejudging the conclusions of the assessment, the thought of limiting delegation matches with broader themes of onshoring and centralising oversight which have come to the fore in EU monetary providers coverage because the 2016 Brexit vote.
Because the EU has grappled with the implications of the Metropolis leaving the bloc’s regulatory purview, Brussels has toughened its assessments of whether or not non-EU monetary providers companies must be granted key market entry rights. The EU has additionally legislated to permit it to power important market infrastructure to maneuver into the bloc to serve European clients.
The UK is the second-largest portfolio administration centre on this planet, managing £8.5tn in belongings, in response to commerce physique the Funding Affiliation. Of this sum, about £2.1tn is managed on a delegated foundation on behalf of EU-based buyers.
The fee session paper solely covers hedge funds and different “various funding” autos akin to non-public fairness funds as a result of it’s the begin of a deliberate assessment of a 2011 legislation, often known as the Different Funding Fund Managers Directive (AIFMD), that regulates the sector.
However the EU’s markets regulator already known as in August for “additional authorized clarifications on the utmost extent of delegation” for each this business and for retail funding funds, that are ruled by a distinct regulatory framework often known as Ucits.
These proposals spooked worldwide asset managers, who concern an overhaul would result in fragmentation and extreme disruption to their working fashions.
Ought to the fee determine to press forward, it is going to relaunch a coverage battle that has already performed out as soon as because the Brexit vote. In 2017, Brussels pushed to toughen enforcement of present constraints on delegation.
Regardless of the passion of some EU governments, together with France, the 2017 plan was ultimately overwhelmed again by different member states, with the criticisms led by Luxembourg, whose massive fund business is intently interlinked with London.
The fee’s session paper additionally questions using nationwide placement regimes that permit fund managers based mostly in non-EU territories, akin to Jersey, Guernsey and the Cayman Islands, to serve shoppers in particular person EU international locations, asking whether or not they “create an uneven enjoying subject” between EU and non-EU fund managers.
There are issues in Brussels that fund managers could also be intentionally selecting that method due to a lighter regulatory and supervisory burden in contrast with organising store in Europe and complying with the AIFMD.