One of the most potentially intriguing panel discussions at this year’s Amsterdam Investor Forum could be “The fund industry in a post Brexit world”, a topic that is sure to ignite the flames of opinion.
Sitting on that panel will be Jack Inglis (pictured), CEO of AIMA (Alternative Investment Management Association). As Inglis points out, this is a topic that is likely to run and run. Indeed, since the Brexit decision was confirmed last June it already feels like we’ve had a lifetime’s worth of press commentary over the last six months.
There is, says Inglis, still a limited amount of clarity. Predictions in the near term for how a post Brexit world will impact the fund industry will be exactly that…predictions, and guesstimates.
“I think it will give us the opportunity to ask some fairly basic questions,” says Inglis. “The first and simplest question ought to be, ‘Do we think there is a lot to fear for the UK’s hedge fund industry, and more broadly its asset management industry, based on what we know so far?’
“My response to that, and it is one that is shared by our members, is that if we are being completely honest with ourselves, it really isn’t likely to be too big a deal; or as big a deal as perhaps it could be for other sectors within financial services e.g. the banks. What is it that we really care about it? We’ve surveyed our membership and we have a pretty good handle on what is important.”
Three things, in particular, stand out.
The first is having continued access to talent. This is no different to what other industry sectors are saying to the UK Government but it is more pertinent to the hedge fund industry given the high number of EU nationals working in the UK’s funds industry.
Second, says Inglis, is what does the future state look like for UK hedge fund managers to continue accessing European markets?
“It’s worth noting that you don’t have to be an EU national to access EU markets. Yes, you will have to abide by EU trade rules but that was the case when the UK was part of the single market anyway. There shouldn’t be too much difference in that regard. Perhaps more problematic will be where does clearing have to occur and about that there is a great deal of uncertainty.
“The third issue is will UK hedge be able to market to investors from the EU? That is probably a significant aspect of what people care about today. You can already do that as a third country so the question is, will the UK be given those same access rights as any other third country? We see no reason to suggest it shouldn’t,” remarks Inglis.
Currently, access is achieved in the main in three different ways: firstly, by reverse solicitation; secondly, by availing of National Private Placement Regimes, but the question here is what is the future of those regimes? “Will they be available in perpetuity or will they be phased out altogether?” questions Inglis. And thirdly, though use of the passports under the UCITs and AIFM Directives.
“What will be important to establish is whether the current ability to delegate the portfolio management responsibilities of a EU AIF or UCITs from a EU-based management company can persist and be made available to UK hedge fund managers who, in a post Brexit world, will become third country managers? We will be advocating that it should indeed be allowed to persist and for the status quo to continue. Swiss and other third country managers for example are already reliant on that delegation process so it’s not solely a UK issue.
“What is the probability of all of those things happening? That’s when it becomes more of a political debate, which will depend on how the negotiation process plays out and how punishing and protectionist it does or doesn’t become. So much has already been said about Brexit but I’m expecting the panel to provide different perspectives and make it a lively debate,” comments Inglis.
What remains uncertain – among many things – is whether the UK will achieve equivalence in line with the AIFM Directive to allow its fund managers to directly and freely market their fund products across the EU using passporting rights without having to establish a EU management company.
There are often misconceptions regarding the passport. Some think it only exists if you are a fully paid up member of the single market. This is inaccurate. The concept of the passport extends to third countries, provided they meet the specific requirements. Last year, Jersey, Guernsey and Switzerland were given a positive opinion by ESMA to operate in this capacity although they have yet to be authorised to do so by the EU Commission.
For the UK, in a post Brexit world the issue of equivalence depends on how much desire there is to have such a passport, which would provide more marketing freedoms. “But at the same time, you would have to accept all the terms of complying with the AIFMD in full.
“In my experience so far, most (but certainly not all) people are happy to access the EU through private placement regimes rather than moving towards becoming a fully authorised AIFM with a licensed AIF to provide a full route to market. That said, although not vital, we would cite equivalence as important in terms of creating a beneficial situation between the UK and Europe,” explains Inglis.
Indeed, the UK’s asset management industry has clearly benefited from the clustering effect in London over the years. In the City, and well-established hedge fund areas such as Mayfair and Knightsbridge, a vibrant ecosystem exists, to the benefit of investors. Any threat to destabilise that fragile ecosystem would be dangerous. “We have valuable expertise and I think it’s important for the UK to want to preserve that. A fragmentation of the asset management industry would result in a less valuable industry to savers and impact the flow of capital to where it is needed – for equity raisings, debt financings, private debt markets etc.,” says Inglis.
One topic that could also surface during the panel discussion is the prospect of whether the UK could become a low tax funds jurisdiction.
“It’s one of the things that we have spoken to before with HM Treasury to help them understand what might happen if you created a tax neutral fund vehicle that could house hedge funds, as exists in offshore centres.
“There is an argument that you could create a UK fund centre with offshore-like tax efficiencies without the UK losing any tax; in fact, it would potentially increase its tax revenues through the associated services and jobs that might be required to support these new vehicles. This is not a new discussion but there is an opportunity to revisit it now that we have had the Brexit decision,” concludes Inglis.
