UK ETF market growth is on hold as asset managers and the Financial Conduct Authority (FCA) wait for the government to grant equivalence for UCITS vehicles.
The UK watchdog, currently consulting on the rules for the Overseas Funds Regime (OFR), recognises the unique distribution of UCITS ETFs as a pan-European product versus other structures.
However, the regulator is depending on a positive equivalence decision from the government to ensure UCITS ETFs can trade in the UK. The FCA is expected to announce a framework for the OFR in Q2.
Gavin Haran, head of policy for asset management at Macfarlanes, told ETF Stream there are several contingencies for ETF issuers to consider as a result of the uncertainty.
“The first is whether the government will deem UCITS to be equivalent in regulatory terms, and if so, whether equivalence will apply on an EU-wide basis or a specific member-state basis,” Haran explained.
“This question is doubly important for ETFs because the Treasury and the FCA will need to decide on the equivalence of the ETF regime too.”
If no equivalence is granted, asset managers would be forced to launch ETFs under a separate jurisdiction in the UK versus the rest of the EU.
Due to the ongoing uncertainty post-Brexit, European giants including Amundi and AXA Investment Managers have opted to wait until there is more clarity before registering their Irish Collective Asset-management Vehicles (ICAVs) for sale in the UK.
Furthermore, the likes of abrdn and Horizon Kinetics entered the market on other European exchanges instead of the London Stock Exchange due to the complexities and cost of launching via the Temporary Marketing Permissions Regime (TMPR).
However, Shane Coveney, partner at Dillon Eustace, told ETF Stream clarification on the OFR – which is replacing the TMPR – will lead to the opening of the UK market to ETFs.
“We are looking forward to getting clarification on the OFR,” he said. “A number of ETF issuers are keenly observing these developments with great interest.”
A positive equivalence decision is vital to the health of the European ETF market. Fragmentation leads to higher costs for ETF issuers and can cause a lack of competition as smaller players struggle to survive amid the rising regulatory burden.
As Haran said: “Post-Brexit uncertainty might be a concern to the extent that compliance with divergent regimes is a burden on ETF issuers and that divergent UK requirements might be enforced via the OFR.”
“But the timeline for UK divergence is longer-term and the broad direction is certain: a similar but different approach to some areas of common concern.”