The European funds industry, like the rest of the financial services industry and indeed many other industries, is awaiting a clear path forward in the post-Brexit environment.
They are seeking a solution which is good for business but which also ensures consumer choice and protection without unnecessary costs. And the industry is not waiting for others to find a solution. The International Regulatory Strategy Group (IRSG) on which the Investment Association and many asset management groups sit, has produced a ‘Blueprint for Mutual Access’, setting out a proposal for the future relationship. More specifically, it enables mutual access to each other’s markets based on a single home state authorisation.
If mutual access is granted, this will be on the basis of regulatory alignment. Such alignment could, in appropriate circumstances, such as the mutual adaption of global standards, result in laws remaining largely the same. In other circumstances, it may be that ‘outcomes’ are agreed and, provided that those are implemented, the detailed implementation may differ.
Many in the industry place a value on cost efficiencies gained from alignment and there seems little, if any, call for a so-called bonfire of regulation.
Continued collaboration between supervisors will also be necessary, especially for firms with larger branches in host countries. We have also proposed an independent dispute resolution mechanism, which protects both parties’ red lines.
The UK has adopted this proposal as set out in Theresa May’s Mansion House speech. More recently, the EU, in an annexe to Council guidelines, has referred to the possibility of a deal that delivers mutual access. Negotiations on the details are about to commence and we remain hopeful. But to bridge the gap between today and any deal, we need a transitional period.
Political agreement has already been reached but legal certainty will not be achieved until the withdrawal agreement is finalised. The UK, in December, gave comfort to EU27 firms passporting into the UK that they would be protected if transition were unexpectedly not agreed. We urge regulators in the EU27 to take a similar approach, giving firms the ability to take actions based on the pre-existing political agreement.
Irrespective of the future deal, many European managers have EU fund ranges. Delegation is often key to such structures. As the Investment Association report says: “Delegation allows investors around the globe to access the best portfolio management expertise.” Specifically, it allows asset managers to utilise specialist staff and analysis, and supporting infrastructure. Ucits and AIFs are able to delegate to third countries provided that there is a regulatory co-operation agreement in place. Many such agreements are already in existence with third countries. Such agreements should be put in place as soon as possible so that firms have certainty that they will be in operation on the date of Brexit, irrespective of the future deal or transition.
The progress in setting the scene for a deal is very welcome indeed. The provision of certainty on transition to enable businesses to plan around it, as well as regulatory co-operation agreements to put the UK on the same footing as other third countries, are surely less controversial.
Rachel Kent, partner and head of financial services regulation, Hogan Lovells
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