Ireland and Luxembourg, the EU countries that have attracted the biggest influx of Brexit-related fund business, are to probe asset managers’ local entities in a move that reflects the level of scrutiny of the so-called delegation model at the heart of fund management.
Financial regulators from both countries plan to review management companies in their jurisdictions to ensure they have sufficient substance and are not operating as letterbox entities.
Many asset managers run a delegated model, in which they domicile funds in Ireland or Luxembourg but manage them from investment centres such as London or New York. EU rules permit this as long as the management company, the EU legal entity sitting behind the funds, can prove they are not shell companies taking orders from portfolio managers in the UK or US.
For the purposes of the review, substance is defined as being “appropriately accountable” and employing a minimum number of local staff, and it became a key issue in the debate over the City of London’s future post-Brexit.
Fearing that asset managers may seek to circumvent Brexit by having a minimal EU presence and delegating the bulk of activity back to London, EU regulators tightened the rules, notably requiring groups to employ at least three full-time employees in the EU.
The Central Bank of Ireland, which regulates Ireland’s €2.5tn fund industry, said last week that it would issue questionnaires to asset managers to assess compliance and follow up with site inspections.
“The scope of our thematic work will be informed by the knowledge that we have obtained through our engagement at a European level and from the considerable uplift in applications for authorisation we have received due to Brexit,” said Michael Hodson, director of asset management at the regulator.
The Luxembourg watchdog, the Commission de Surveillance du Secteur Financier, also said it would make site checks at asset managers’ local operations, with the threat of sanctions.
CSSF director Marco Zwick said asset managers needed to take the exercise seriously, warning that its outcome could affect future rules governing delegation.
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