UCITS Funds Face Regulatory Crackdown in EU, Spurred by Brexit

Letterbox entities are being targeted in a new regulatory shakeup, which collectively hold up to $10.3 trillion in assets.

The specter of Brexit could lead to the transfer of thousands of jobs from investment firms, due in part to a shift in regulations regarding jurisdiction and legality. Regulators are cracking down on ‘letterbox entities’, or UCITS funds, which are based in the European Union but run remotely from abroad – these funds will no longer be tolerated under new regulations, which could lead to another shift in personnel.

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Undertakings for Collective Investment in Transferable Securities (UCITS) are mutual funds based in the EU that can be sold to any investor within the bloc under a harmonised regulatory regime. With Brexit severing the country’s link with the EU, the European Securities and Markets Authority (ESMA) could be stifling UCITS funds in the UK, and beyond.

New rules

Back in May, the group announced that passports to sell funds would be rejected unless major decisions are made by management based within the bloc, according to a Bloomberg report. This law had helped fund managers to offer their products globally. The rule change is extremely relevant given that it affects funds whose holdings amount to over $10.3 trillion in assets.

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On a positive note, investment managers will not have to wait long for clarity on the issue, as ESMA is set to publish a second take and consultation this month. Over $1.25 trillion in UCITS fund assets are currently domiciled in the UK – this is not simply a London phenomenon however, as these products are also commonly domiciled in Luxembourg and Ireland, with fund managers operating on a global basis.

Regardless, the impact at least in the UK could trigger the exodus of thousands of jobs. London has already been seen as the epicenter of job losses in the financial services industry. The banking sector has been reeling for the past two years with pink slips being doled out en masse to personnel in IT, back-offices, and trading desks.

Compliance nightmare

Consequently, UCITS funds may find themselves under siege on a global scale, with the regulatory shakeup possibly triggering a widespread upheaval of funds. Ironically, the rule could further entice groups to relocate to Dublin, which had already been seen as an attractive contingency plan and locale for life after Brexit.

As such, this could see an uptick of talent in the governance and compliance space, with UK firms all likely to seek regulatory approval and licenses in the bloc. Logistically speaking, fund managers are able to garner an authorization application for a new jurisdiction – in this case the EU – within around nine months.

This means that groups should have by June 2018 to disclose their plans, talking into account the current Brexit timetable however. By extension, less developed passporting jurisdictions such as Asia or Latin America (LATAM) also remain an option, though it is unclear if this is the route that UK firms will wish to take.

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