Funds unlikely to rely on equivalence post Brexit – expert

Mon, 21/05/2018, 16:02
Fund managers would not trust equivalence as a reliable post-Brexit framework as the solution favoured by the European Union creates uncertainty, according to lawyer and buy-side regulation expert Charles Muller. 
“The problem with equivalence is the day European legislation changes, they will say ‘now the UK legislation is not equivalent anymore, the passport is gone’ or, alternatively, if the UK starts changing its rules, Europe could also say ‘the rules are not equivalent anymore,’” said Muller, an external adviser and former partner at KPMG Luxembourg. 
“So the equivalence regime is a very uncertain method, and asset managers would probably not rely on equivalence because they run the risk that due to some changes in legislation on the European or on the UK side there is no equivalence and no passport anymore.” 
In her letter to the President of the European Council which triggered the Article 50 notication in 2017, Prime Minister Theresa May stated that the UK did not seek membership of the EU Single Market post Brexit. 
Instead the debate has focused on equivalence provisions and more recently mutual recognition. 
However, many firms consider equivalence less favourable than the current trading relationship between UK and EU nancial services, in which firms can use a “passport” from their home country to serve customers across the Single Market. Senior EU gures such as the European commissioner for nancial services, Valdis Dombrovskis, have defended equivalence as a pragmatic solution for the UK nancial services industry after Brexit. (
Luxembourg’s nance minister, Pierre Gramegna, has advocated for an enhanced equivalence regime as a potential post-Brexit bridge. 
The chief executive of Britain’s Financial Conduct Authority (FCA), Andrew Bailey, has claimed however that mutual recognition would be a more suitable model than existing equivalence regimes. 
Such a solution, Bailey has said, would require “cooperation and coordination structures” to seek regulatory consistence while allowing for independent rulemaking. 
But the 27-member bloc would likely reject the UK’s desired model because doing so would trigger an array of requests from third countries, Muller warned. 
“Mutual recognition would be a much more reliable regime, but there Europeans say ‘well, we don’t like that so much because, one, if we give it to the UK, the Swiss will come and they will want it, the Americans will come and they will want it, so everybody would want it,’” he argued, adding that asset managers could go to the UK in search of more exible legislation while beneting from mutual recognition. 
“Speculating, the US and some Asian countries have asked for mutual recognition for years and decades, and the EU, including the UK, has always said no. So I think the no will stand, but I could imagine that equivalence would be oered. The question is: will asset managers nd that that regime is stable enough to use it?” 
In the face of uncertainty, asset managers would be wise to set up shop in the continent to ensure access to European investors, Muller said, echoing the words of Association of the Luxembourg Fund Industry (Al) chairwoman Denise Voss. (
Unless major hurdles arise, portfolio management will largely remain in Britain, Muller said, although the European Commission’s (EC) proposal to give the European regulator authority over delegation could pose a signicant risk. 
Delegation rules allow funds to be domiciled in an EU jurisdiction such as Luxembourg or Ireland while portfolio management is delegated elsewhere. 
The EC is proposing that the European Securities and Markets Authority (ESMA) oversee delegation rulings when activities are delegated to non-EU countries like post-Brexit Britain. 
“If that proposal comes through, then it will have a signicant impact on the way the European fund industry is working,” Muller said. 
“There would be uncertainty not just for UK-based managers but in general for all non-EU-based asset managers – and even for those that are inside the EU and that nevertheless delegate outside.”

Original post on, by Pablo Mayo Cerqueiro.