EU Securities Regulator Takes Aim At London Fund Managers

The European Union’s securities markets regulator called Wednesday (Aug. 19) for long-term extension of regulations concerning how British fund managers can operate in the European Union post-Brexit, Reuters reported.

The rules were designed to curtail the use of shell companies that are listed in EU countries but outsource major functions to operations in London and elsewhere in the U.K. and have the effect of letting the British companies skirt rules requiring major portions of fund managers that operate in the EU are based in the EU.

The European Securities and Markets Authority (ESMA) outlined its request in a 26-page letter to Valdis Dombrovskis, European Commission executive vice president in charge of financial services.

The letter states, in part: “In these cases, the majority of operational staff performing portfolio/risk management, administration and other functions work on a delegation basis for the relevant funds and are therefore not directly employed by the authorized … management company. As a consequence of this, and as an important indicator for extensive delegation arrangements, a large amount of the management fees generated by the authorized … management company are paid to delegates.”

Although those delegation setups “may increase efficiencies and ensure access to external expertise taking into account the global nature of financial markets,” the letter continues, “they may also increase operational and supervisory risks and raise questions as to whether those AIFs and UCITS can still be effectively managed by the licensed AIFM or UCITS management companies.”

The current rules targeting shell companies in financial services were enacted after British voters opted in 2016 to leave the European Union in what is commonly called Brexit.

The letter states there is a significant likelihood the shell-company operations at issue will only “increase” going forward due to Brexit. The context for the letter was review by EU regulators of alternatives investments such as hedge funds.

Jake Green, a financial regulatory partner at Ashurst law firm, told Reuters, “Put simply, this is an attack on London.” He added, “It is also doubtful that Luxembourg and Ireland will be happy with this as it could materially impact their fund offerings.”