It’s hard to go to Luxembourg and not talk regulation. It’s even harder at the Association of the Luxembourg Fund Industry Global Distribution Conference, where Brexit and other regulatory matters were firmly on the agenda.
For the remaining member states the outlook is good. There are more opportunities for fund managers than ever, and it is unlikely Brexit will impact the EU as negatively as early predictions suggested, Luxembourg’s former minister of finance Luc Frieden said.
“Brexit is not a major issue for Europe, the rest of Europe will move on. The outcome of the elections in the Netherlands, Germany and France indicate that there are people in charge who want to build something positive [in the wake of the UK leaving the EU].”
He said the bloc has overcome the challenges of the past 10 years, and is coming out of a deep crisis that has “actually been managed quite well.”
“People are no longer asking if the euro will survive,” he added.
But for the UK, the outlook is much less rosy. The conference delegates agreed Brexit is proving difficult, not least because of the uncertainty surrounding how the country’s fund managers will do business with investors on the continent if it leaves the single market in 2019.
In fact, there are still “no answers at all” on how UK private fund managers will market their products to European investors if the country leaves the single market in 2019, Julie Patterson, head of investment management and regulatory change at KPMG, tells pfm.
The National Private Placement Regime, which allows non-EU managers access to investors in the bloc, is due to be phased out from 2018 and replaced by a passporting system. But Brexit negotiations are widely considered to be behind a delay to a roll-out of passports.
She added it was “unlikely” the UK would be approved for a passport in time for a 2019 exit from the EU.
“The UK is the major player in the European financial services market. Any move that would enable continued reliance on the UK [as a financial hub] post-Brexit may be difficult to make while Brexit negotiations are taking place,” she says.
Six countries were recommended for a passport last year by the EU regulator, the European Securities and Markets Authority. But the European Commission, which is ultimately responsible for issuing the passports, delayed the decision, which had been due in December.
Since then, ESMA has suggested that the system be overhauled, because it is “time and resource intensive,” and the commission has not said when, or if, it plans to make a decision on granting passports to the countries already recommended.
The extent to which the management company delegation model – a popular strategy which allows funds domiciled in the EU to give management responsibilities to a UK-based manager – will remain a viable option adds to the uncertainty.
“The debate is still underway, but it’s likely that more processes will need to be done in the fund domicile,” Patterson says.
The Alternative Investment Fund Managers Directive, the regulation that imposes the marketing restrictions on non-EU fund managers, was scheduled to be reviewed in 2017, but while the Commission has launched an impact analysis a wholesale review has been delayed, unofficially because of Brexit.
Fund managers generally consider it to be a successful piece of regulation, but there are aspects they would like to see reformed. Cross-border fund marketing rules are among them and ALFI chairwoman Denise Voss voiced her support for reform.
“With marketing still being under the pretext of member states, we support the harmonization of it cross-border. There is also a need to define what marketing is and isn’t to improve that function across the EU,” she says.
She added that in their current form, pre-marketing rules can cause legal issues and any harmonization of the funds marketing process would need to deal with this.
The European Commission is currently mulling changes to marketing rules, following a consultation and an impact assessment published earlier this year which found variations to marketing rules and procedures across member states are creating barriers to cross-border fund distribution.
Changes under consideration include harmonizing national marketing requirements, practices, and what constitutes marketing. The Commission also intends to clarify the application of marketing rules for online distribution. There is no timeline for a decision, however.
A boon for business
The Directive has, however, increased the number of non-EU managers looking for EU-based domiciles because it allows them to market funds across Europe.
“We’re starting to see the promise of the AIFMD, with institutional investors willing to pay more for better regulation,” Voss adds.
The regulation has attracted many of the larger private equity and real estate investment firms to Luxembourg in particular. Private equity was the slower of the two to do so pre-AIFMD, says Freddy Brausch, vice-chairman of Alfi, and partner at Linklaters.
Since the Brexit referendum, the grand duchy has also seen an influx of managers that would have otherwise domiciled funds in the UK. A recent survey of European CFOs found that 47 percent were considering domiciling their funds in the country, compared with just 5 percent that opted for the UK. Among the firms to have set up operations in Luxembourg this year include Carlyle, Blackstone and EQT.
Responding to concerns raised by CFOs at Invest Europe’s CFO Forum earlier this year that the country might become saturated, Voss argued it was not a risk.
“Where firms have the choice, outsourcing and the use of technology will relieve pressure on the Luxembourg funds infrastructure.”