In the UK, fund managers are already managing around £400bn ($520.8bn) on behalf of Apac clients, according to a white paper published by the NCI. A majority of those assets are regulated under European Union law, principally either the Ucits or the Alternative Investment Fund Managers Directive (AIFMD) framework.
However, the NCI said that the previous uncertainty over Ucits regulations, particularly about delegation rules, have opened an opportunity for the UK to exploit.
At the moment, there are no delegation or substance rules under the Ucits regime. Those rules usually govern which activities must be conducted in both the EU and non-EU countries.
For example, Asia-Pacific-based fund managers are able to delegate a management company in the EU to provide the regulatory supervision and oversight framework to control their funds’ operations and distribution.
However, the UK’s decision to leave the EU pushed European policymakers in 2018 to look at incorporating substance rules, according to a Citibank finreg outlook published at the time.
“A large percentage of the assets held in Ucits funds are managed in London. Some policymakers think that once the UK exits the EU, it should no longer be able to be a major asset management hub for European funds,” Sean Tuffy, head of market and regulatory intelligence for Emea custody and fund services, said in the report.
If delegation to UK-based asset managers is removed, non-EU fund managers, including those in UK post-Brexit and Apac, would have the additional operational cost of opening subsidiary branches in the EU, according to the NCI.
“The current delegation rules are unlikely to be changed. Even though ultimately the third-country fund manager assurances have been forthcoming, the entire incident has damaged the EU’s reputation, especially in Apac circles.
“Moreover, the EU’s ongoing refusal to extend the much-vaunted AIFMD marketing passport to core APAC jurisdictions, namely Hong Kong and Singapore, has done little to help matters either,” the NCI added.
The NCI acknowledged that competing against Ucits funds will be difficult, especially since it has amassed at least €10trn ($11trn) in assets globally.
Other competitors
In order to make a UK-branded fund structure attractive to Apac investors, the UK would need to simplify existing tax rules for foreign investors, according to the NCI report, quoting an unnamed lawyer.
“The unit trust and open-ended investment company (OEIC) never took off in Apac because the UK tax regime is too complicated whereas Luxembourg and Ireland are more straightforward,” the lawyer said.
The report added that the UK would have to forge delegation agreements with different Apac markets, which mimics the existing EU delegation framework.
However, the NCI acknowledged that there are other new fund structures in Apac that would make it difficult for a UK fund brand to compete. For example, Singapore recently launched its variable capital company (VCC) framework, while Hong Kong also rolled out in 2018 the open-ended fund company (OFC) structure.
Industry players have already adopted the new fund structure. In Hong Kong, Mirae Asset Global Investors launched three ETFs under the OFC regime this month, while private fund manager Pacific Hawk Global became the first to adopt the structure.
