One of the main concerns stemming from the UK’s vote to leave the EU is what will happen to its funds industry if the country loses its passporting rights. Asset managers may be forced to move headquarters.
Hermann Beythan, partner at Linklaters, believes that if the UK does face a passporting block, then Luxembourg could replace it as the major hub for financial services.
He said that the Luxembourg Stock Exchange is already the leading international bond listing venue so could see an increase in the listing of bonds and other financial instruments, especially given that a prospectus approved by the regulator in one member state can be used for marketing throughout the EU.
He added that if the passport disappears, UK branches of EU management companies (‘mancos’) would have to be licensed under whatever new rules applied in Britain and would be completely dependent on the UK regulator.
Owen Lysak, senior associate at fellow ‘Magic Circle’ law firm Clifford Chance, sees a problem if UK funds have to be reclassified. If the UK loses its passporting rights, current UK Ucits funds would become alternative investment funds (Aifs) and would no longer provide the level of investor protection associated with Ucits.
Lysak told Funds Europe: “If they [Ucits funds] become Aifs, it is very difficult to sell to retail investors. For existing structures there might be a lot of pressure to make sure there’s a transitional period, as you don’t want retail investors already in those funds to be put in a difficult situation.”
For Beythan at Linklaters, the answer is to have an EU-based manco distribute Ucits funds with the investment management delegated back to the UK. This would not impact where the asset manager is headquarted.
While Lysak also says more asset managers may re-locate to Luxembourg, they – unlike banks – have the luxury of a wait-and-see approach, meaning asset managers may simply observe where the banks go and follow them.
“Fundamentally it’s going to come down to everybody’s particular situation which is why you might see a split across the different locations rather than one hub developing above all others,” said Lysak.
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