Brexit begins to bite
So, to Luxembourg where – The Lens found – institutional asset managers are increasingly worried that tough post-Brexit rules on mutual funds proposed by the European Commission could threaten the bedrock of Luxembourg’s success.
When the European Commission suggested last year that post-Brexit, it planned to beef up the powers of the pan-European financial regulator – the European Securities and Markets Authority (Esma) – there was a howl of protest from Luxembourg.
At the heart of the debate is the concept of delegation, which allows funds to be set up by asset managers in one EU state while outsourcing the investment management to fund managers in another country.
Under the Ucits framework, which the UK will stop being part of once it leaves the EU, such cross-border funds can then be sold across the EU. Luxembourg, home to one out of every ten funds in the world, has said it wants to remain a partner of the UK’s financial services industry after Brexit.
But for the UK-EU divorce to remain relatively painless from a fund management point of view, the crucial question is whether Esma will allow portfolio management to be delegated to the UK once the divorce is sealed.
The delegation model, which impacts around 90% of the assets under management (AuM) in EU funds, has allowed relatively small cities such as Luxembourg and Dublin to transform themselves into the EU’s top hubs in which funds are based, while allowing investment management to take place not only in EU financial centres such as Frankfurt, London or Paris but also those further afield such as Hong Kong, Singapore and New York.
France, which has made no secret of its hopes of attracting more asset managers to Paris, has not surprisingly welcomed the Commission’s plans to clamp down on so-called ‘letterbox’ entities, where only a token number of staff are employed within EU member states.
However, for asset managers in Luxembourg contacted by The Lens, the Commission’s proposed plans have not gone down so well.
Brexit will primarily harm London’s standing as a financial centre, but it is increasingly clear that, while many European financial centres will gain some jobs at London’s expense a hornet’s nest of legal issues have been thrown up by the UK’s vote to leave the EU.