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Analysis
Concern over loss of passports

Concern over loss of passports

Brexit disruption for UK asset managers

by Guy Sears and Angus Canvin in London

Wed 11 May 2016

Financial services exporters are justifiably concerned about what might replace the system for sales of financial services to the European Union if the UK votes to leave on 23 June.

Britain’s trade with the rest of the world plays a vital role in the referendum debate. This matters because the UK financial services industry generates a trade surplus with the EU estimated at £72bn for 2014, the latest available year, more than all other UK net exporting industries combined.

The UK asset management industry, for which the Investment Association is the national trade association, is a particular success story. The sector is by far the EU’s largest, with about 37% of total EU assets under management.

Under the present system, UK asset managers may export their services to the rest of the EU under so-called ‘passports’, allowing an asset manager in one EU member state to provide its services in (or to customers in) other member states without the obligation to comply with additional local regulation. A common feature of EU financial services law, passports are at the core of the EU single market in financial services, from which the UK derives significant economic advantage.

A UK-based asset manager may manufacture, market, sell and manage collective (or pooled or mutual) investment funds organised under the umbrella of Undertakings for Collective Investments in Transferable Securities. These funds must be domiciled in an EU country. While most distribution is within the EU, the UCITS brand is globally distributed.

UK asset managers can also service the rest of the EU collective investment market (such as hedge funds for high-net worth and professional investors) under the EU’s AIFMD passports, named after the Alternative Investment Fund Managers Directive. Additionally, British asset managers service the global institutional market (including pension funds and insurance companies), facilitated in the EU through a passport under the EU’s MiFID legislation, named after the Markets in Financial Instruments Directive.

Of course, the passport system could be improved. Some EU members impose local requirements, such as time-consuming registration of documentation, or the need to have a local business presence. The Investment Association has drawn these local distortions to the attention of the European Commission, which has pledged to work to eradicate them. But these problems are minor irritants compared to the business benefits of the passport system.

The Commissioner with responsibility for financial services, Lord Hill, has warned that British departure could deny UK-regulated funds access to the EU market, since UCITS funds cannot be domiciled in a non-EU country.

Investment Association analysis concludes that, should there be a full UK exit resulting in the UK having third-country status, this would profoundly disrupt the export of asset management services and products.

While there are alternative models which might reduce the impact, leaving in such circumstances would not be a desirable outcome for the UK asset management sector.

Guy Sears is Interim Chief Executive and Angus Canvin is Senior Adviser at the Investment Association. This is No.53 in the series – the 100th article will appear on 23 June.

OMFIF’s series on the UK EU referendum presents a wide variety of perspectives from Britain and around the world ahead of the 23 June poll. We are assuring a balance between many different points of view, in line with OMFIF’s overall neutral stance on the issue.

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