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On 26 January this year, HM Treasury issued a call for input on the future of the UK funds regime. We provided initial analysis in the previous edition of Depositary Insights, and we also responded to the Treasury’s paper. As we enter the second half of the year, more than six months after the end of the UK-EU implementation period which came after Brexit, it is a good time to reflect on the call for input and what the process might tell us about the future of the UK funds regime. We will also share our own thoughts on the proposals.
The UK funds regime call for input was a key piece of post-Brexit regulatory engagement, and provided an early indication of the government’s thinking on how the regime might look going forward. Its significance was increased in part by the fact that the deal agreed between the UK and the EU at the end of the implementation period contained little detail on the financial services sector, and the UK-EU Memorandum of Understanding on financial services regulatory cooperation also appears to be at a relatively high level, beyond a commitment to work together and to establish a UK-EU Financial Regulatory Forum.
Priorities that emerged from the call for input were therefore telling. A wide range of initiatives was consulted on across 38 questions, including speed to market for new funds, efficiencies that could be gained in the fund authorisation process, the branding of fund types, fund taxation, reform to structures such as Qualified Investor Schemes, the introduction of the Long Term Asset Fund, and how to grow skills and jobs across the UK. There were also overarching considerations in terms of how to make the UK a more globally competitive funds domicile.
The consultation closed on 20 April, with next steps expected later this year.
NatWest Trustee and Depositary Services view
NWTDS responded to the consultation, considering our response through the lenses of investor protection and strong governance, which are core to our purpose. Our response focussed on themes such as how we can grow the UK as a global centre for funds; how we can enhance the ‘shop front’ of fund product types; our insights into the UK-wide nature of the industry; and the key role that ESG will play in terms of the future growth and competitiveness of the industry in the UK.
Growing the UK as a global funds centre
In our response we noted that whilst the UK is a global centre for investment management it ranks behind leading fund domiciles such as Ireland and Luxembourg, as evidenced by EFAMA’s March 2021 Quarterly Statistical Release, which shows the UK is the fifth largest domicile for UCITS and AIF funds.
To prevent further investment fund outflows from the UK to Europe, we argued that the government’s aim should be to promote the UK as an attractive location to domicile funds due to its high standards of governance and investor protection. This will require the government, industry and regulators to work together to create a dynamic UK funds regime, followed by clear promotion of the UK to send a strong message that the UK is ‘open for business’.
The role of depositaries in marketing the UK as a global funds centre
We noted that the UK has a high global reputation for fund governance and investor protection, and that the depositary is a key part of this process. Arguably there is less awareness of the key role that the independent UK depositary plays in supporting the UK’s international reputation, and so we noted that well-regulated UK depositaries provide a vital oversight function for UK funds, in the best interests of end investors, contributing to the UK’s overall reputation for strong governance.
Fund types and the UK’s ‘shop front’
We support the rebranding of the NURS regime as “UCITS Plus” or an equivalent label, as we feel that this better reflects its nature, and aligns with the popularity of the UCITS among retail investors. It is important to have an attractive and diverse ‘shop front’ of trusted fund types to support the international competitiveness of the regime.
To meet the needs of domestic and international investors we therefore noted that the UK must enhance its existing fund range and introduce new fund structures such as the Long Term Asset Fund (LTAF) and the Onshore Professional Fund (OPF) regime to fill a gap in the UK fund regime.
A UK-wide industry
We consider the UK funds regime to be truly UK-wide, investing in jobs and skills across the country. As the industry as a whole looks to deliver value for end investors, we noted that locations beyond London and the South East are likely to grow and we argued that firms will benefit from government support to help achieve this. As a depositary with significant resources in both London and Edinburgh we are an example of an organisation investing in jobs and skills across the UK.
Seizing the opportunities of ESG
The UK has an opportunity to become a pre-eminent global centre for responsible and sustainable investment, responding to increasing demand from investors for products that deliver long-term value and patient capital. We see significant benefit in having an independent party with the right access to data, which already plays a significant role in the operation of the fund, providing oversight and verification of stated performance criteria, to support overarching fiduciary duties to investors.
The UK government and regulators are in the process of considering what the regulatory regime is to look like going forward, and the call for input has been a critical initial part of this. There are clearly opportunities to ‘level up’ the industry so that it is more competitive internationally, whether that be through reforming fund types, increasing focus on ESG, and growing skills and talent across the UK. Central to the UK regime’s attractiveness however is its reputation for strong governance and investor protection: looking forward, this will remain critical as the UK seeks to become the leading international funds domicile.