The potential loss of passporting and its impact on distribution to the EU: UCITS

UCITS funds represent 60.7% of European investment fund assets, and the UK forms the third largest market within the EU (after Ireland and Luxembourg), with 12.6% of UCITS AUM held in UK domiciled funds. They are highly popular, and are seen as a safe and well regulated option for retail investors.

Through the management company passport and the fund passport, UK firms are currently able to be management companies of UCITS funds, and to freely market UCITS funds to retail clients throughout the EU. The UCITS brand is a powerful marketing tool, and often drives the marketing of UCITS funds outside the EU also.

Therefore if the UK’s future relationship with the EU does not include full access to the EEA – or any alternative arrangement that would retain passporting – then UK asset managers will lose the benefits of management company and fund passporting provided under UCITS. There is no concept of non-EU UCITS funds; funds that fall outside the UCITS regime are covered by the AIFMD.

The impact of the loss of EU membership on UCITS business will vary from firm to firm, depending on where the firms, their funds, and their clients are located. While we wait to see what form Brexit will take, and the impact on the investment management industry and wider FS industry will be this summary considers the distribution implications for three types of asset managers which we believe most firms will be able to identify with:

1. Mostly focused on the UK
2. Some presence in Europe
3. Full presence in Europe

1. UK to predominantly UK

Scenario: A UK asset manager which is mainly focused on the UK market, but uses feeder funds to in order to access EU clients.

Impact: The main impacts to UK-focused firms would be the potential loss of the recognised UCITS brand and its marketing benefits, and also the loss of ready access to the EU market through feeder funds at relatively low cost.

ucits1

1. Once UK management companies and UK funds cease to be domiciled in the EU, the UK UCITS funds will lose the “UCITS” status, even if they continue to fully meet the requirements for UCITS funds

2. As they are no longer UCITS funds, they will not be able to be the master to UCITS feeder funds domiciled in the EU

3. The UK will therefore lose its access to the EU retail clients who invest in the feeder funds

With the loss of the feeder fund, the UK asset manager would have no other presence in the EU, and may therefore choose to focus on the UK entirely. In order for the asset manager to manage UCITS funds in the EU, it would need to set up a management company in the EU.

2. UK to UK/EU

Scenario: a UK asset manager which has UCITS funds domiciled in the UK and the EU and acts as the management company for both locations. Portfolio management is delivered from the UK for both locations. The UK asset manager has a satellite office in the EU, mainly to support distribution to EU clients.

Impact: There could be significant impact for UK firms that wish to retain their EU UCITS funds and clients, as they would need to set up – or add substance to – an EU management company in order to do so.

ucits2

1. Once UK management companies and UK funds cease to be domiciled in the EU, the UK UCITS funds will lose “UCITS” status, even if they continue to fully meet the requirements for UCITS funds

2. With the loss of EU membership, and the UCITS status, it will no longer be possible to market the UK funds freely across the EU (currently in order to  be marketed in the EU, they would fall under the AIMFD regime), and EU UCITS funds in the UK (announcements to date around passporting have been more general and inconclusive, rather than addressing these specific UCITS concerns

3. The UK Management Company will no longer be able to be a management company of an EU UCITS fund and in order to maintain a similar level of access to EU retail clients, the asset manager would need to add substance to the satellite office to create an EU management company to replace the UK management company for the EU UCITS fund

4. The same investment team would still be able to manage the EU UCITS fund as the EU management company would be able to delegate portfolio management back to the UK, providing there are no changes to the current UCITS regulations in this area

 

3. UK/EU to UK/EU

Scenario: a global asset manager which has UCITS funds and management companies domiciled in the UK and the EU. Portfolio management is delivered from the UK for all UCITS funds, delegated by the EU management company.

Impact: There would be limited impact on firms that have management companies in both the EU and UK, as they would already have the infrastructure to maintain the EU UCITS funds, but would need to reflect the loss of the UCITS brand in their UK marketing.

ucits3

1. Once UK management companies and UK funds cease to be domiciled in the EU, the UK UCITS funds will lose “UCITS” status, even if they continue to fully meet the requirements and have the profile of UCITS funds

2. With the loss of EU membership, and the UCITS status, it will no longer be possible to market the UK funds freely across the EU (currently in order to  be marketed in the EU, they would fall under the AIMFD regime), and EU UCITS funds in the UK (announcements to date around passporting have been more general and inconclusive, rather than addressing these specific UCITS concerns)

3. The EU management company would still be able to delegate portfolio management back to the UK, providing certain conditions are met, meaning there would be no change to the investment team managing the EU UCITS fund

 

Notes:
In these examples we have focused on options of managing UCITS within the asset manager, and not included the option of using an external UCITS platform
All references to “EU” should be taken to mean “EU excluding the UK”

References:
EFAMA Quarterly Statistical Release, September 2016, No 66