Medium-sized and boutique UK-based fund groups without an offshore product range would face costly regulatory barriers to distributing their products more widely if Britain votes to leave the European Union, experts have warned.
In particular, they would struggle to sell their products easily on the continent as they would no longer have access to the UCITS passport system, and could even find it harder to distribute non-UCITS funds to local buyers who now favour the structure.
Stuart Alexander, chief executive of Gemini Investment Management, said: “UCITS is a fund’s trading document that enables them to be sold from one country into another without question as it already abides by a pre-set legal system the EU countries are happy with.”
But, if you are a purely [UK] domestic-focused business, you will no longer be able to sell your funds into Europe as easily after an exit, which will be absolute carnage for fund groups.”
Should investors fear a Brexit from the EU?
UCITS is a Europe-wide settlement that permits the UK to remain a domicile location for funds, and means fund groups can ‘passport’ financial products into Europe.
However, if the UK becomes independent, this will be much harder to do, and more costly. Funds that were previously sold into Europe via UCITS may have to be re-domiciled to a new EU country such as Ireland, Luxembourg or Malta, and seek new authorisation under the UCITS directive.
This is an expensive process as each of these countries requires a significant amount of capital to be moved to the country, with Luxembourg requiring groups to have €10m of capital on their balance sheet. Dublin rules stipulate only €300,000 is required by firms.
It can also take up to six months to set up a fund in Luxembourg, meaning fund groups need to act soon if they wish to continue operating in Europe.
No date has been set by the government for the UK referendum on EU membership, but many believe it will be held as soon as this summer.
Support for an exit has gained recently, with polls suggesting 47% of people support an exit versus 38% that want to stay. The remainder are as yet undecided.
Alexander said the Brexit issue will be particularly pressing for mid-sized UK firms that have £1bn-£5bn in assets under management. These are groups which would have used the UCITS structure to distribute their funds into Europe as they look to grow their business.
Larger fund groups are not likely to be as affected by a potential Brexit as many already operate subsidiary companies in Europe, or offer offshore fund ranges alongside their onshore products.
These firms can also move their manufacturing/distribution to Europe more easily, although this is still a costly process.
However, as many fund buyers now expect products in their portfolios to have a UCITS structure, even fund groups only selling UK-domiciled funds to UK investors could also be under threat.
“UCITS is written into many people’s investment process. If UK funds cannot tick the ‘UCITS box’ anymore, they will have to change their investment disciplines as the products will no longer fulfil their criteria,” said Alexander.
While an equivalent UCITS structure could be set up between an independent UK and the EU, this could take several years to create.
Alexander’s comments come as Investment Association interim CEO Guy Sears also highlighted the implications for financial services of a Brexit at a Treasury Select Committee session last week.
Sears warned there would be “massive disruption” following a Brexit but raised the possibility of UCITS funds being re-classified as alternative investment funds, which could allow them to continue to be sold easily on a cross-border basis.
However, Alexander believes that under AIFMD there is a likelihood rules would be even stricter for fund groups to meet.
Need to know: UCITS funds
• UCITS funds are typically domiciled in tax-neutral jurisdictions such as Ireland or Luxembourg
• They must be organised under the laws of an EU member state and are subject to regulation by the state in which they are domiciled
• Once registered, the fund can be marketed throughout the EU and other jurisdictions that recognise UCITS, subject to local marketing requirements
• Any investor of any EU member state in which the fund has given proper notification can invest