A mid-year financial regulations report from Citi has highlighted delegation rules for UCITS funds as a key issue to worry about for asset managers.
Delegation of certain asset management activities outside of a UCITS fund’s domicile has become one of the many sore points in Brexit negotiations as the European Securities and Markets Authority (ESMA) is likely to insist on having a greater role in authorising such set-ups.
This stance puts it directly at odds with the authorities in Luxembourg and Ireland, both of whom have issued strongly worded rebuttals against tampering with delegation.
Historically, the majority of delegation has been to the UK, which is the leading asset management hub in Europe.
“Similar to the rethink on third-country provisions, Brexit has caused some EU policymakers to call for changes to the delegation arrangements,” said report author Sean Tuffy, Head of Market and Regulatory Intelligence, Custody and Fund Services, EMEA at Citi.
“These policymakers would like to change the UCITS rules to restrict the delegation of asset management outside the EU. Incorporating delegation restrictions requires changes to the UCITS framework, which isn’t an easy task.”
Tuffy added that the debate may stretch into 2019, and will be a key issue for the asset management industry.
Delegation is frequently used by EU fund structures, such as UCITS and firms compliant with the Alternative Investment Fund Managers Directive (AIFMD). It permits a fund to outsource portfolio or risk management to an entity in a third country.
ESMA has said it does not want letterbox entities to emerge, nor see any of the EU 27 markets scaling down on regulatory oversight to win business from financial institutions looking to relocate portions of their operations post-Brexit.
In April 2018, Global Custodian reported that with the growing commotion about the fate of delegation – a practice many third country managers are reliant on –some industry figures feel that UCITS’ international credibility could suffer irreparably if protectionist sentiment takes hold.