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Clamp down on ‘letterbox’ entities by the EU could help boost Irish funds sector

Investment firms may have to move thousands of jobs to the European Union after regulators said “letterbox entities” nominally based in the EU but in reality run from abroad will no longer be tolerated, lawyers and advisers say.
The proposal would affect UCITS, a type of mutual fund domiciled in the European Union, that hold about €9.1trillion of assets.
The move could see Luxembourg and Ireland – major centres for the sector – attract or create thousands of jobs in areas from governance to compliance if UK firms have to re-register within the EU, according to John Skelly, a Dublin-based principal at Carne Group, an adviser that helps set up UCITS funds.

The European Securities and Markets Authority (ESMA) said in May that passports to sell funds – effectively, a stamp of approval allowing fund managers to offer a product globally – should be rejected unless major decisions are made by management based within the EU.
Post Brexit it would hit the UK, where almost €1.1 trillion of UCITS fund assets are domiciled, according to PricewaterhouseCoopers.

UCITS products are often domiciled in Luxembourg and Ireland, but their fund managers can be based anywhere in the world to focus on local markets. ESMA, which could publish a second take on its opinion this week, said the guidance was prompted by Brexit as it seeks to avoid a race to the bottom in oversight standards.
“It could be a threat to the viability of UCITS at the global level,” Dan Waters, managing director at fund management association ICI Global, said in an interview. “There are trillions of euros, dollars, pounds of investments going back and forth right now” through the products, and there’s a chance that the regulator “could inadvertently build barriers around that.”

ESMA, which does not have legislative powers, published the opinion as part of an effort to unify European regulators’ approach to fund registration following Britain’s vote to leave the EU. Since the Brexit vote, several nations have said they’re keen to grab slices of Britain’s financial industry.
The guidance on UCITS – an acronym for Undertakings for the Collective Investment of Transferable Security – is the first time ESMA has said that a certain amount of fund activity should be based in the EU, but it so far lacks specifics on what functions will have to be done in the bloc, lawyers say.

“The opinion seems to overreach” directives around fund regulation, said Simon Currie, a London-based partner at legal firm Morgan Lewis who advises clients on setting up operations in the EU.
“It’s quite clear in the directives that you can delegate decision-making in connection with portfolio management to a third country.” (Bloomberg)

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