New players who want to enter the ETF market in United kingdom Post-Brexit stares at the barrel of high legal costs and long delays, an unintended consequence of Brexit that stifles innovation and gives more established exporters a huge advantage.
While all eyes were focused on public health and geopolitics, the clock has passed Britain’s exit from the European Unioncontingency plans. The ETF industry now faces the prospect of a two-year regulatory gap that could block opportunities for new issuers trying to enter the UK.
This chain of events began before the UK formally left the European Union, when the Financial Conduct Authority (FCA) established the Temporary Authorizations (TPR) and Temporary Marketing Permissions (TMPR) system to allow financial services firms located in the European Economic Area (EEA) to continue trading and marketing their products. in the UK.
In very simplified terms, this meant that ETF issuers could register their EEA-based platforms, such as Irish Collective Asset Management Vehicles (ICAV), under the TPS before the 2020 exit date.
Once they get one “drop“From the FCA, they can continue to send current and future subsidiary funds from these recognized platforms to the UK for a maximum of three years from the end of the “Transitional period” I March 2022.
Fortunately, most established companies have been able to bring their money platforms – or “umbrellas” – In TPR, which means they can enjoy the same seamless access to UCITS until they enter the OFR system.
ETF issuers use platforms as tools to set up their strategies, perform accounting functions and from there market to different countries.
Adopted by the British Parliament, OFR will create a mechanism to give other fund systems equivalent in marketing to the UK. Although the OFR would give the FCA more freedom to approve or reject funding requests than it did during UCITS, the industry is clearly pushing for the process to be as frictionless as possible, says Peter Capper, a specialist in finance and investment risk at Investment Association (IA), for ETF Stream.
Unfortunately, there is a gap in contingency planning, with a gap between three important dates. While the maximum entry limit for TPR was December 31, 2020, Capper said OFR is not yet available — and it may not be until next year or early 2024 in “Worst case scenario”.
For now, non-TPS platforms and funds from the European Economic Area are still treated as a UCITS fund in the UK, but that will not be the case when the FCA transition period passes at the end of March.
After that expiration date, there is still a lack of clarity about how UCITS funds – including ETFs – will be marketed in the UK, despite the UK’s Financial Services Authority reviewing wholesale markets last year, according to Reza Naim, international law adviser at Linklaters. .
“There is a lag that makes life a bit chaotic. We know that some obligations will disappear and some systems will be presented as OFRs, but that has not happened yet,” Naim continued. “We know the political trend is going somewhere, but the supervisory authorities have not been fast enough.
“The TPR will continue until entry into the Inland Transport Services Office but separately from it, it has obligations and rules that say, for example, that you can treat the EU’s UCITS fund as a UK UCITS fund – while from a legal perspective Strictly in the UK, they are now going to be Alternative Investment Funds (AIF) – everything is still there for now.”
Woe to the newcomers!
A situation where this leaves non-TPS money is far from ideal. Asset managers who have platforms in place before the end date can apply to end their UK operations under the Financial Services Contracts Scheme (FSCR).
New entrants to the European ETF market – who release their umbrella after the TPS deadline – must apply for recognition under Section 272 of the Financial Services and Markets Act 2000 in order to market their products to the entire UK market, the FCA said. ETF Stream in a comment.
The IA’s Capper said the recognition process under Section 272 entails legal costs.In the very high five It can take anywhere from four to six months compared to UCITS where the costs are “negligible” and the time frame is weeks.
“Section 272 of the FSMA has been used very rarely in the past and the experience of those who have tried it shows that it will be a very time consuming and expensive process,” Capper added.
“It would probably be an almost linear analysis by the FCA to look at parity to see how the fund system meets UK requirements. If it takes a while for the OFR to come in they might consider a simplified clause 272, but I’m not sure how feasible that is.
The only positive is that when an umbrella gets recognition, the sub-funds must get approved but don’t have to go through the same recognition process every time. Capper noted that while Section 272 can be simplified, he does not see this as a path many ETF issuers would like to take.
Naim agreed that the process was so “very Difficult” For those who failed to enter the TPS but said the alternative was marketing exclusively to the affluent segment of the retail market which admitted that “Very annoying”.
“They can’t sell their money to the UK mass market, they can only sell their money to specific, specific private investors,” Fortsat Naeem. “And even to fall into it, they must feel comfortable with someone verifying that individuals meet the requirements for high net worth.”
Unfortunately, this can discourage new entrants to the ETF market, as many of the lesser known players make their money on less vanilla parts of the market – such as Thematic ETFs That attracts private investors.
worth the trouble?
These barriers have already stymied potential ETF participants in the UK market, even before the FCA transition period ends.
Philip Lovegrove, an attorney for the Matheson investment fund, told ETF Stream: “There is a significant amount of work involved in registering a new Irish umbrella for sale in the UK at the moment.
“This is not something clients are eager to address. Therefore, they are looking for alternatives to avoid this or waiting for the situation to improve either through more regulatory changes or market practices that evolve as a number of other funds go through the process and set precedents.”
Manoj Mistry, who helped launch Merrill Lynch’s first European ETF, leads the ETF division at DWS and is now COO of Hanitevsaid the process of marketing subsidiary funds from the new EEA platform to the UK is ‘Long and expensive’ where “You are treated like an American or a Japanese box.”
Mistry revealed that this was one of the challenges Abrdn faced when intending to launch an ETF business in Europe “Because obviously he would have needed to create a new platform.”
As an ETF issuer, you don’t want to go through the hassle of doing this. You can spend your time and effort in a more productive way. “
That’s an interesting development given that Abrdn hired Chanchal Samadder to the Lyksor sales team in March 2021 – a sign they were preparing to launch in Europe – only to see how Samadder retires after eight months.
Elsewhere, a US-based ETF issuer – who did not wish to be named – told ETF Stream that they plan to launch products in Europe in the coming months and while the cost of a passport to the UK has been “An order of magnitude higher” Than other jurisdictions, he was more concerned about potential delays.
“The main issue is that it will not be available to UK investors within six months.”the source complained. “It shouldn’t take six months to review something that is being traded across Europe.”
After anticipating some changes in access to the UK via ICAV, the US player said it was willing to absorb the costs of a particular opportunity to enter the UK market with its flagship product. But with their second UCITS ETF, they said they would choose Germany as their primary list and then “Look closely and see how it goes.” Prior to committing to listing in the UK.
Fundamental changes in the industry
This unfavorable environment will likely have frustratingly predictable effects on European ETFs – and mutual funds – in general.
HANetfs Mistry said that barriers to new entrants will inevitably strengthen the dominant high-end operators.
“In many ways, as an existing ETF platform or provider, you are happy that no one else can enter the market. The path for new participants has become more difficult,” claimed.
In addition, Mistry said that Black Rock currently has “five or six” The platforms from which they launched their iShares ETF in Europe while DWS operated three platforms during his tenure.
Although there is no official guidance on how many umbrellas an issuer should have, decision makers such as the Central Bank of Ireland (CBI) would be skeptical about an issuer’s ability to provide oversight for its ETFs if it operated with a few hundred of the same instrument.
“The second advantage is flexibility. Follow Mystery. “If you have an older platform that is undergoing changes, you may not be able to use it to launch an ETF for a certain period of time. As a result, you have a second funding platform to be able to launch ETFs in the meantime.”
In contrast, European ETF issuers may be at a disadvantage due to restrictions on launching new platforms, which could affect their ability to expand.
Another effect could be a blow to the UK’s attractiveness as a business destination. IA’s Capper rightly suggested that those struggling to get into the London market would simply look elsewhere to list their products – a risk the IA has already highlighted to Her Majesty’s Finance Department (HMT).
In support of this, staff from the incoming ETF issuer suggested that they had not heard of any new platforms that had applied for UK recognition since the equation was replaced by Section 272.
Waiting game OF
One way asset managers can avoid the long wait for FCA recognition is to set up a series of UK matching funds, but HANetf’s Mistry has warned by exiting its “efficiency centers” in Ireland and Luxembourg, that issuers are They will lose. He. She. on economies of scale – which means it will eventually pass on additional costs to the end investors.
Another way might be to simply wait for the OFR to arrive. In this regard, Capper cautioned that the FCA is at an early stage in advising HMT on the degree of UCITS equivalency to be awarded under the OFR.
The FCA considers it on a regional basis, so it’s all UCITS and the EU, but they can do it on a country-by-country basis, in which case they’d look at Irish UCITS, Luxembourg’s UCITS, and French UCITS, for example.
he added: “There is a possibility that we will see something about the valuation of the value, which is a requirement of the British fund, but at the moment the picture is quite murky.”
Naeem advised: “If we’re convinced OFR is coming in the next few months, I’d say wait, but two years is a long time, so in that case I’d tell them they can go ahead and put those restrictions in place. [på vem de kan marknadsföra till]based on how attractive the UK market is they think.”
The FCA said the HMT office is led by HMT but is working closely to provide technical advice.