Smaller and boutique asset managers in the UK could be helped in growing their businesses by the setting up of a tax transparent fund structure enabling them to compete with leading EU fund jurisdictions such as Luxembourg and Ireland, according to a new report from the Independent Investment Management Initiative (IIMI).

‘Simplifying the UK fund regime for boutiques: A response to the FCA consultation’ contains the IIMI’s views on the Financial Conduct Authority’s discussion paper published last February as part of the so-called Edinburgh Reforms, a government initiative designed to stimulate growth and competitiveness in the UK’s financial services industry following Brexit.

This undertaking is intended to be enshrined in law by the Financial Services and Markets Bill, currently at the report stage in the House of Lords, which gives the UK government extensive powers to overhaul, amend or retain EU regulations applied to financial services, including asset management.

The FCA’s ‘DP23/2: Updating and improving the UK regime for asset management’ set out ideas for improving asset management regulation with a more modern and tailored regime supporting the UK’s position as a leading asset management centre.

In its report, written by Charles Gubert, the IIMI’s head of regulation on the basis of conversations with its boutique asset manager members, and external lawyers and consultants, the IIMI said that a tax-transparent fund structure would be the best way to compete with leading EU fund jurisdictions.

It said this could lead to the development of a robust, domestic asset servicing industry, which would have a “very positive” effect on job creation.

The FCA’s discussion paper suggested that a degree of consolidation between AIFMD, MiFID and UCITS could help streamline the rules and simplify compliance obligations for asset managers. A survey of chief operating officers and chief compliance officers from IIMI’s membership found that 75% of respondents would support some sort of consolidation.

But the IIMI said it is critical that any new rules do not diverge too much from the EU, as this will add to the managers’ compliance burden.

However, the IIMI supports the idea of easing some of the assets under management (AUM)/investor thresholds for full scope compliance with AIFMD, as this will help facilitate cost benefits for boutique managers at a time when their overheads are rising.

And it said that improving practices around liquidity risk management and encouraging modernisation of fund operations should be actively encouraged.

An IIMI spokesman said: “While we welcome the FCA’s consultation and remain optimistic towards its outcome, the regulator must ensure that the integrity and capacity of boutique asset managers are not compromised. The introduction of excessive compliance obligations, for instance, would require a disproportionate amount of work and expenditure for boutique managers.”

He said that this directly contrasts with the industry giants which can manage and afford to have the necessary frameworks in place.

“Although meeting AIFMD requirements is not an extra cost burden for boutiques relative to larger managers, the cost of compliance is proportionately higher,” he observed.

The spokesman added: “Liquidity risk and operational resilience are two of the greater risks associated with boutiques, which generally have smaller back offices and often invest further down the market cap spectrum to capture an investment edge.”

He continued: “A focus on both liquidity risk and operational resilience by the FCA is therefore essential for ensuring that boutiques remain competitive. We encourage the FCA to recognise these nuances in the industry during their decision-making process in order to avoid unfairly disadvantaging boutiques.”

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