It is clear that the British exit is changing the shape of the European fund industry and that the strategy of the EU27 needs to be adapted accordingly. However, I feel that some big countries are using Brexit as an excuse to try to reorganise their market shares in the EU.
In the 30 years since the implementation of the Ucits, the success of the ‘small’ domiciles – Luxembourg and Ireland (supported by big non-EU managers from the US and Switzerland) – has made bigger countries feel threatened, especially since the Ucits product from these domiciles is being widely exported globally. The last attempt to try to ‘redistribute the cake’ was with the AIFMD, when the supervision focus was shifted from the product to the manager in the hope that alternative managers would prefer to sit in major cities such as Paris or Frankfurt instead of Dublin or Luxembourg.
A review of power
The first assessment of the AIFMD after seven years of its existence shows that this attempt was unsuccessful. Currently, Brexit is used as an excuse to trigger regulatory developments aimed at reducing the power of these two countries. The first such attempt has been made by Esma by directing all ‘Brexit-related’ files (with a very broad definition of what that means) to be presented by national regulators to a coordination group, which are being vetted and assessed against criteria that do not seem very transparent. Needless to say, most files come from the CBI and the CSSF, and some national regulators are trying by that bias to gain influence in the market and even are more flexible on substance in their home jurisdiction than what they request from the Esma group.
The second attempt is the review of powers of the ESAs where it is proposed that Esma shall review all files that contain a delegation element outside the EU (not just to the UK but to all non-EU countries, including the US and -Switzerland). This measure, if adopted, would hardly impact the French or German fund industries, which are mostly domestic, but would significantly impact those domiciles that have a global reach, such as Ireland or Luxembourg.
Question of change
The officially stated rationale for these new measures is baffling and always comes down to one argument – regulatory convergence. Strangely enough, you do not seem to need regulatory convergence of requirements as long as you only delegate in your own country or another country in the EU, but only if you delegate outside. The question raised by big non-EU asset managers is why the EU suddenly wants to change a system that is currently functioning smoothly.
According to the representative of a big US fund house, “now that we have found the solution, all we need to do is find the problem”. Another question raised is who is going to do the work and who will pay for it. Esma currently has neither the staff nor the money. In addition, it is not clear how much more time this additional layer of supervision will add onto the approval process. The cost/benefit analysis is significantly off the mark.
This is currently the ‘hottest’ topic in the fund industry debate and therefore, unsurprisingly, was also the main theme of the morning session at the Alfi conference that I chaired, with Esma head Steven Maijoor defending his plans and industry representatives giving their not-always-very-kind views. The ball now lies in the court of the European Parliament and the Council, and the Luxembourg government has made its scepticism quite apparent. So, affaire à suivre.