As we prepare (or not) to leave the EU (or not) at the end of the month (or not), we have to hope that the agencies of State, including the FCA, have got it all worked out. Strangely enough, this form of activity appears to be something that our bureaucrats are actually rather good at. Competence, Caution and Care could almost be their motto. For that reason, however difficult two parliaments and at least one Commission try to make it for them, some of us remain optimistic that Brexit is not going to be a disaster.
A fine example of CCC is the MoU between the FCA and EU27. As with so many really vital developments, the announcement of the MoU agreement was made with no fanfare, either from its creators at FCA or from those who will, between them, over time, reap billions therefrom. While all the talk had been about Equivalence, the measure to avoid the delegation crisis that the awkward squad was happy to foster in its attempt to divide and rule, was ‘supervisory cooperation’, the very purpose of the MoU. While many were wisely and properly pointing out that ESMA had arrived at its quite apolitical opinion that delegation after Brexit would be the greatest threat to EU civilisation the world had ever seen, that ESMA would ensure that national regulators all around the bloc would see off the untrustworthy hordes of investment managers free-running outside the platinum curtain, others suspected from an early stage that the threats to delegation were empty.
But can we really say that the MoU has entirely neutralised the risk? Perhaps not. Perhaps the European Commission will come forward with new measures to put higher hurdles in place. Perhaps the regulators in Luxemburg will suddenly discover a vocation for regulatory enforcement. Perhaps EU governments and populations will be happy to have to buy funds that can’t employ the world’s best investment managers. But probably not.
After all, ask yourself how this MoU came about at this crucial moment. Less than two months before a possible no-deal, the near impossible task of arranging 27 bilateral agreements was obviated by central coordination by none other than ESMA, directed by Sir Howard Davies’ (former FSA chairman) former private secretary.
So much for management. But what about the marketers? Their lot is looking a great deal less happy. As matters stand, there will be no means by which UK funds can be marketed to EU retail investors. A fund domiciled in beastly Blighty will, even where it adheres perfectly to the UCITS limits, even where it has for years been deemed fit for EU consumption, will be an AIF to be treated with all due suspicion from Brexit day itself, if we depart without a transitional period designed to defer the moment of truth.
Well, at least it will keep out EU competition. But not so fast! Being the good citizens that we are, we will have the Temporary Permissions Regime, which will allow, for a year or three, EU funds to continue to be marketed here, just as before. Not for us the instant barrier or pretence that risks have somehow changed overnight. EUCITS will still be sold on the streets of London while BrUCITS could be banned from EU Strasse. The FCA has hinted that this might not be ideal, that consideration might usefully be given in the salles to provisions that would provide time for mature discussion. The industry itself has remained pointedly silent, either out of bravado or for fear of waking the ogre.
Let’s be clear, the question is this: what sort of a deal for EU access for UK funds might be realistic? The debate has not raged, but the question stands. The industry, so prolix in its trepidation at losing the passport, has suddenly decided to play the Trappist monk. Looking forward, as we always do, of course, we need to identify the solutions we seek. Suppose the FCA maintains a regime which shadows UCITS indefinitely. And suppose, having committed ourselves to pure rule-taking in that area, we propose to permit EUCITS access to UK retail investors on condition of reciprocity, what would be the outcome? We might or might not get agreement, but that will depend on how hard we try, how concerned EU manufacturers become over the future of access to the UK and whether the EU remains governed by the purist high priests of the single market or whether the already-detectable winds of change introduce a degree of pragmatism into European thinking.
Some would say that rule-taking was unacceptable and that this would be a compromise too far. That too seems to be a purist approach of no real weight. Then, as now, UCITS would be an optional regime for fund managers, bringing benefits in the form of EU access. The choice would remain, as now, of alternative forms of UK retail funds, a range that might well be expanded over time as FCA gradually recovers its initiative and develops new and varied retail funds, attractive to the world, even if not to the platinum prisoners. Whatever the state of the NHS, there will always be NURSs in town.