1048 GMT December 04, 2021
European Union policymakers last year said they planned to toughen scrutiny around so-called ‘delegation’, where a fund is legally based in one country but managed from another, in time for Britain's exit from the EU in 2019, Reuters reported.
The European Securities and Markets Authority (ESMA) said in May that it wanted funds in Britain to have sufficient ‘substance’, or employees, in the EU after Brexit.
The aim is to stop any EU state allowing ‘letterbox’ entities in an effort to attract firms from London.
The European Commission also presented a draft law in September to grant ESMA powers to check if delegation arrangements met certain conditions and to recommend their withdrawal, if needed.
The draft law needs approval from EU states and the European Parliament.
Luxembourg and several other EU members oppose giving ESMA such powers, while France, which is home to ESMA, and Greece are among those states backing the changes. Funds say it will add to their costs and that these will be passed on to consumers.
Delegation arrangements are now policed by national watchdogs. ESMA has said it did not want to damage the long-standing, global practice.
The plans have shocked many of those offering €9 trillion in funds under the EU's flagship UCITS brand, most of which are domiciled in Dublin and Luxembourg but managed across the world, from the United States to Japan and Brazil.
Dan Waters, managing director of ICI Global, whose members manage a collective $30 trillion in assets, said the move appeared to be political and designed to win business from Britain as there was no evidence of the need for change.
"We had the ESMA opinions in the summer, which we didn't much like," he said, adding that ‘zero evidence’ had been provided for changing rules that ‘have been working perfectly well’.
"Worse, much worse, was the Commission regulation," he said, adding that the Commission's draft law took the industry and others by surprise, "including most of the member states, which is pretty shocking".
Vanessa Mock, spokeswoman for EU financial services Commissioner Valdis Dombrovskis, said the commission is not proposing to change the substance of rules on authorization and delegation.
"Our aim is instead to ensure that there is full transparency among supervisors on how they apply the rules, with a view to consistent application of these rules," Mock said.
National watchdogs would only notify ESMA if a fund intended to delegate significantly to a country outside the bloc to check that investor protection and financial stability were not undermined, she added.
Waters said the proposal was made without consultation on costs and benefits or impact on markets, and that ESMA and the Commission had not shown how existing delegation rules were not working.
"There is no evidence, so our objective at this point is that article should be stricken from the proposal," he said.
The EU's funds industry body, EFAMA, also opposes the new delegation proposals.
Nicolas Mackel, chief executive of Luxembourg for Finance, which promotes the Grand Duchy as a financial center, said that ‘very few’ countries backed the plans and that funds had to be more vocal.
"If they come out and communicate more on what the actual practical consequences of this will be for consumers of financial services, what this can mean for pension funds in terms of inefficiencies and cost, that is probably something that will speak to politicians more," Mackel said.