BoE’s Deputy Governor Cunliffe warns EU over curbing cross-border funds after Brexit

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Curbing the ability of asset managers located in Britain to run funds based in the European Union after Brexit would be costly and inefficient and could fragment markets, Bank of England Deputy Governor Jon Cunliffe said on Friday.

The bloc’s securities watchdog ESMA published guidance last May on how UK-based asset managers could continue to run funds in the bloc after Britain leaves the EU in March 2019.

It says there must be enough “substance” or senior management on the ground in the EU country where the fund is listed so that not all key tasks are delegated back to Britain.

The aim is to stop some EU countries competing by offering easy licensing conditions to UK-based asset managers wanting to open a hub in the bloc after Brexit.

Asset managers fear this will mean having to move staff to the bloc after Britain leaves the EU in March 2019.

Cunliffe said that if the EU’s move was motivated by a desire to pull activity and risk back within its boundaries after Brexit, then this “could act as the harbinger of fragmentation to come”.

“That would raise the cost and reduce the efficiency of market-based intermediation of savings in the EU and, if it led to wider effects, further afield,” Cunliffe said in a speech to an asset management forum in California.

Cunliffe quoted figures to show that managers in countries elsewhere in the world, like the United States, managed more funds in the EU than managers in Britain did.

Over half the $8.5 trillion of assets being managed in Britain are pensions, insurance and investments of British citizens, Cunliffe said.

Less than 20 percent of assets managed in Britain are domiciled in the rest of the EU in centers like Dublin and Luxembourg.

Cunliffe said Brexit itself is not going to lead to a “huge scale” regulatory risks for the bloc, though fund managers need to delegate responsibly.

“Delegation must not be allowed to become devolution,” he said.

U.S. fund managers have said the EU risks closing itself off to outside expertise and could prompt retaliatory measures.

Alarm among asset managers increased after the EU’s executive European Commission proposed last year to give the ESMA a say over delegation arrangements.

This is currently the purview of national regulators, and the proposals face opposition in some EU states.

ESMA has said there is no intention to scrap the delegation model.

Cunliffe did not address the outlook for British monetary policy in the text of the speech provided by the BoE.