The Hong Kong asset management association has warned that a Brexit-related overhaul of the EU’s retail fund rules could have the unintended consequence of undermining the dominance of European funds in Asia.
Sally Wong, chief executive of the HK Investment Funds Association, said any move by the EU to unpick the outsourcing model on which global asset managers rely could spur Asian countries to seek to lure capital away from the €17.7tn European fund industry.
Funds governed by Europe’s retail fund framework, known as Ucits, are sold across the world and are particularly popular in Asian jurisdictions such as Hong Kong, Taiwan and Singapore.
Part of the success of Ucits funds is so-called delegation, which allows asset managers to set up a fund in an EU country and carry out portfolio management in another location, such as London, Hong Kong or New York.
But in August the EU’s top financial regulator recommended sweeping changes to the delegation rules in response to Brexit. Though the proposal has not been formally adopted, it is expected to be taken into consideration in the upcoming review of the EU’s asset management rule book.
Ms Wong said that policymakers in Brussels should carefully consider the global implications of any changes to delegation, noting that Asian authorities’ increasing focus on boosting their local fund industries made it an “inopportune moment” to review the rules.
Hong Kong and Taiwan have taken steps to boost the attractiveness of locally domiciled funds in recent years, while Singapore launched a new fund structure in January in a bid to lure global fund managers. In addition, some Asian countries have come together to launch cross-border fund passport or mutual recognition schemes.
Ms Wong said Asian authorities may seek to profit from the fragmentation created by an overhaul of the Ucits rules by speeding up their attempts to win local business. “If [the] proposed changes undermine [Ucits’] core strength and bring uncertainty to the industry and investors, there is all the more reason for [Asian regulators] to accelerate these changes,” she said.
Her comments are the latest in a series of warnings that changes to delegation would threaten the seamless market access that has driven the huge growth of the global asset management industry.
Paul Schott Stevens, chief executive of the Washington-based Investment Company Institute, another trade group, said the proposal to limit delegation was the latest example of an anti-globalisation mindset. “It would be a real concern if that relatively free access to best-of-breed investment services was compromised,” he said.
However, Stewart Aldcroft, chairman of Citigroup’s Asian fund servicing arm, said increased costs because of restrictions on delegation would not necessarily be enough to entice international fund groups to launch onshore Asian funds.
“Global managers have often avoided local set-up in Asia as they try to avoid proliferation of funds,” he said. Fund groups would only establish more local products if they anticipate high sales potential, he added, noting that with the exception of the China-Hong Kong scheme, the other Asian fund passporting initiatives have so far generated “negligible volumes”.
Yoon Ng, director of Asia-Pacific insights at Broadridge, a research company, added that while demand for European products would fall in countries where local fund pushes are under way, managers would continue to favour Ucits because of its cross-border portability. “None of the Asian fund passports come close to the reach and scope of Ucits,” she said.