Industry Updates

US-domiciled ETFs could be granted equivalence in UK

Charles Schwab AM ‘closely’ watching UK regulatory landscape

Theo Andrew

US and UK flags

ETFs domiciled in the US could be granted equivalence under the UK government’s Overseas Fund Regime (OFR) in a move that would open the market to US-listed ETFs.

The Financial Conduct Authority (FCA) launched a consultation with asset managers last December on how products should be recognised under the post-Brexit framework.

The UK government granted equivalence for all UCITS vehicles in the European Economic Area (EEA) in January, with US-listed ‘40 Act’ ETFs also being considered.

Any move would need to be approved by the UK Treasury deeming the regulatory regime for the overseas fund to be equivalent to the UK.

US-listed ETFs are not currently available for sale under EU law as they do not publish certain documents required by the European and Securities Markets Association (ESMA).

Charles Schwab Asset Management, which does not currently have any ETFs registered for sale in Europe, said it is keeping an eye on regulatory developments in the UK.

A spokesperson said: “When it comes to offering US ETFs broadly to our clients in the UK, we know there is a tremendous amount of interest and are watching the regulatory landscape closely to see what may be feasible in the future.”

Gavin Haran, head of policy for asset management at Macfarlanes, believes US-domiciled ETF equivalence is likely, but not for some time.

“There are still a few steps to think about before onshore US funds will be sold to UK retail investors,” he said.

“We will get to US ETFs being on the OFR. There are just various hoops to jump through and questions to be decided before we get to that point. It is not going to happen tomorrow.”

Despite interest from Charles Schwab AM, Haran said US issuers may prefer the tried and tested route of domiciling ETFs in Ireland and using the OFR to passport into the UK over being directed straight to the UK.

“It depends on how the player wants to deal with the regulation,” he said. “How do you want to sell your products in the UK?”

Emma Garnham, senior associate at Macfarlanes, added Ireland’s favourable tax treaty with the US may also be a reason asset managers will look to domicile there over targeting the UK directly.

“With OFR nearly up and running [Ireland] becomes an easy pipeline for US managers compared to waiting and hoping for US equivalence to come through.”

The Treasury’s granting of equivalence for UCITS vehicles was warmly welcomed by the industry and was touted as cementing the “UK’s place as the leading global centre for investment management”.

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