Calls by Mark Carney and Andrew Bailey for the UK fund sector to be reformed after Brexit have been greeted with scepticism by industry veterans.
The thunderous warning from Mr Carney, the Bank of England governor, that investment funds “built on a lie” are widely sold to the British public has blown open the debate over how Britain should regulate its £9tn asset management industry after the UK leaves the EU.
Mr Carney’s blast at a parliamentary hearing last week followed the claim by Mr Bailey, head of the Financial Conduct Authority, that “flawed” European rules contributed to the meltdown at the flagship fund run by Neil Woodford, the UK’s best-known fund manager.
Mr Bailey has suggested that the UK should return to a more principles-based approach to financial regulation, departing from the rules-based framework developed by the EU.
Mr Bailey said Mr Woodford’s Equity Income fund had used “to the full” an “excessively rules-based” EU regime that caps the proportion of unlisted assets a fund can hold at 10 per cent.
The UK policymakers were joined in their criticism of European fund rules by Pascal Blanqué, chief investment officer of Amundi, the €1.5tn French asset manager, in a rare call for increased regulation from a high-profile industry boss. In FTfm he is quoted as saying that liquidity mismatches in funds were a systemic problem, and adds: “Regulation is needed, the sooner the better.”
Experts warn that the UK is likely to face significant obstacles in charting a new path for fund regulation after Brexit.
Philip Warland, an investment industry veteran who advises fund boards, said the UK could create a structure for non-EU clients post-Brexit, allowing it to diverge from current EU liquidity standards.
However, he added that it was not clear whether these rules would differ significantly from the current European regulations.
Sean Tuffy, head of market and regulatory intelligence at Citi’s custody and fund services unit, said: “Practically speaking, it’s hard to see what the UK would change in the Ucits liquidity rules to avoid a repeat of recent events. Arguably, the issue with the Ucits liquidity rules is that they were not perceptive enough.”
Monica Gogna, a partner at Dechert, the law firm, said the introduction of “overly restrictive” liquidity rules in the UK could put British fund managers at a competitive disadvantage.
The European Commission has told the FT that it does not see any reason to review the Ucits liquidity rules in light of the Woodford crisis. It said the rules were “clear but need to be applied in order to ensure the intended protection of investors”.
Mr Warland said Brussels would be reluctant to overhaul the Ucits framework that has become a gold standard globally.
“The Ucits regime is one of the few clear successes of the EU,” he said. “It is accepted by regulators and investors globally as a safe structure through which to invest.”
The introduction of high-level principles risks putting the UK at odds with EU regulators, which are reluctant to allow leeway to fund managers given that Ucits funds are sold to retail investors across Europe. If the UK adopted this approach, it could curtail fund managers’ access to the EU market as the UK system may not be deemed equivalent.
Kay Swinburne, the former vice-chair of European Parliament’s economics and monetary affairs committee, said Brexit had “undoubtedly changed” the way the EU viewed financial services. She said some European policymakers wanted to tighten the rules around EU market access for non-EU financial players.
“I’m still optimistic that the UK and EU will continue to work closely together,” said Ms Swinburne, vice-chair of financial services at KPMG UK, the professional service provider.
Moreover there are divisions among UK policymakers about how to overhaul the rules governing investment funds post-Brexit. A regulator that did not want to be named said the UK would be “barking mad” to attempt to develop rival rules to Ucits, a process that could take years and cause significant uncertainty.
