Delays to OFR funds recognition scheme leaves UK out in the cold

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More than two months since the UK said it would give a green light to asset managers keen to bring innovative European-domiciled funds to the UK market, exchange traded fund providers are still waiting for the final go-ahead.

City minister Bim Afolami attempted to provide assurance at the end of January when he said in a statement to MPs that the overseas fund regime would treat European Economic Area regulation as equivalent to its own.

The UK government has said it it will draft and bring forward legislation enacting the equivalence decision in due course, parliamentary time allowing.

However, industry figures say that as the OFR has still not been implemented, interest in the UK market from newer issuers is dissipating, with only the most determined prepared to spend the time and money to bring their products to list in London.

Stephen Carson, head of asset management and investment funds at Irish law firm A&L Goodbody, said that in the absence of the OFR, the UK was continuing to operate on measures brought in after Brexit came into effect and passporting of EU funds into the UK could no longer continue.

The so-called temporary permissions regime allowing existing EU-regulated fund providers to market their funds in the UK only applied to incumbents.

Since the end of 2020, investment managers that establish new fund ranges in Ireland or elsewhere in the EU have had to rely on an “outdated s272” UK recognition process, Carson said.

“Achieving recognition for marketing under the s272 process has proven to be a very lengthy process — up to nine months in the early days,” Carson said. While this time period has fallen to between four and six months, it was still a lengthy and costly process, he added.

“As a result, some investment managers have held off registering their new ETF ranges for sale in the UK pending the introduction of the overseas funds regime,” Carson said.

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Hector McNeil, co-founder of HANetf, a white-label ETF provider that specialises in bringing ETFs to the European market, said the current situation had changed the route to market for new European ETF issuers without existing access to the UK.

“We used to do LSE then Deutsche Börse,” he said, pointing out that while Germany was the biggest ETF market in Europe, launching on the London stock exchange not only gave issuers access to the second largest, it also had greater marketing reach. Now, he said, issuers that could not use existing agreements were going straight to Deutsche Börse and some were holding back entirely on a UK launch.

Neither McNeil nor Carson could put a figure on the number of ETFs that might have bypassed UK, depriving the London stock exchange of their listing and UK investors of the opportunity to access them.

The LSE declined to comment.

People with knowledge of the situation said that the OFR was expected to be implemented this summer.

Industry figures said they were waiting for an announcement from the Financial Conduct Authority, the UK regulator, which was expected imminently.

The FCA also declined to comment.

“From a UK investor perspective this may mean that they have not been able to access some of these products, at a time when European ETFs are, following the US lead, becoming a wrapper for a broad range of innovative active, buffer and defined outcome products,” said Carson.