LONDON Some British asset managers face a rise in costs to keep selling one of Europe's most lucrative mutual funds to wealthy investors on the continent and beyond if the country votes to quit the European Union.
With a referendum three months away, many asset managers are weighing how they might cope with a 'Brexit', including the possible loss of the right to sell funds freely across the bloc.
Uncertainty surrounds Britain's entire relationship with Europe should its citizens opt on June 23 to leave the EU.
Matters would be further complicated if Britain decides - or is forced - to stay outside the European Economic Area (EEA), a grouping in which non-member states such as Norway have access to the EU's single market.
Under this scenario, fund managers without operations in the bloc may no longer be able to sell a brand of funds regulated in the EU and known as UCITS (Undertakings for Collective Investment in Transferable Securities) to non-UK investors.
This type of fund, broadly seen as the gold-standard for regulated mutual funds, has proven popular among wealthy retail savers in Europe and further afield, where the UCITS brand has become synonymous with transparency and liquidity.
Britain has around a 13 percent share of Europe's 8 trillion euro ($8.8 trillion) UCITS funds industry, data from trade body EFAMA showed.
UCITS funds are subject to EU rules and asset managers selling them must be supervised by the authorities of a member state, regardless of whether the money is invested in the bloc or elsewhere in the world.
It is unclear precisely how much is invested for non-British EU clients in British-domiciled funds, although one trade source put the figure at around 60 billion pounds ($85 billion).
Retaining the right to sell UCITS internationally, and hold onto the assets already managed for valuable continental European retail clients, may prove difficult in the event of a messy split with Europe, lawyers and consultants said.
"For the retail market, the EU boundary is a hard boundary," Julie Patterson, KPMG's head of investment management said. "The only way a UK manager could continue to access the French or German retail market post-Brexit is by having an EU entity and there are set-up and running costs associated with this."
Many of these clients, which include charities, family trusts and individuals, pay higher fees as a proportion of assets invested compared with institutional investors such as insurers or pension funds.
A FEW OPTIONS
UK fund firms have a few options if they want to keep offering UCITS funds to these high-margin clients.
One is to do what managers based in non-EU Switzerland, which also lies outside the EEA, already do: create a management company and staff an office in an EU funds hub such as Dublin or Luxembourg. There they could launch new funds to mirror the UCITS products they might be barred from selling internationally from Britain.
Another is to pay a fee to sell these UK-domiciled funds through a third party who does have the required EU base, a method many hedge funds currently use to sell UCITS products.
Otherwise they could redomicile the UK UCITS funds altogether, although this would be time consuming and may carry a tax hit for investors, lawyers and consultants said.
Trade body the Investment Association has warned of "massive disruption" in the event of a Brexit vote, a sentiment not shared by some of Britain's biggest fund providers.
Schroders said it was not carrying out significant Brexit planning, while Henderson saw only a "modest" impact, but others are less sanguine.
Earlier this month, insurer Prudential renewed calls for Britain to remain in the EU, warning that an exit could make it harder for its UK fund management arm M&G to attract investors.
BONANZA FOR LAWYERS
While not all of the money in UK UCITS funds would need to move overnight in the event of a Brexit, lawyers would probably enjoy a bonanza as firms tried to get the paperwork in place and reassure investors of their plans.
Setting up a management company from scratch in Dublin or Luxembourg would typically incur at least 100,000 euros in legal and tax advisory fees and take 2 to 6 months to complete, three law firms told Reuters, but total costs would rise once office and staffing costs were factored in.
"The management company cannot be a 'letter box'. They would need at least two to three qualified executive directors and potentially a team of employees. Staff costs in both jurisdictions can also be higher than London/UK," Matt Huggett, partner at Allen & Overy, said.
Firms which opt to set up a new EU fund to mirror UK-domiciled funds should expect to pay between 50,000 and 100,000 euros in legal fees, before paying at least the same again to move investors across.
Any firm which does decide to redomicile a fund could be forced to foot the bill for any "tax event" or hit to investors, who might otherwise pull their cash out altogether.
"They wouldn't want the shift to penalise investors. If there was a tax event, the (asset manager) firm might end up paying for it," Patterson said.
The operational shuffle expected following a Brexit could also hurt continental European fund firms which want to sell funds to investors in Britain. They might have to set up fresh company or fund structures in Britain to ensure continued access to UK clients, lawyers said.
"To avoid the uncertainty which would follow for the two years after a vote to leave, firms will likely do work in the third- and fourth-quarter future-proofing their business," said Alex Haynes, funds lawyer at London-based Stephenson Harwood.
($1 = 0.7097 pounds)
($1 = 0.9026 euros)
(editing by David Stamp)
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