April 7, 2013 4:16 am

UK ‘late to game’ with fund drive

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The British government is “late to the game” with its proposals to improve the attractiveness of the UK as a fund domicile.

Chancellor George Osborne has promised improvements in fund regulations, tax rules and marketing to ensure Britain’s investment management sector can match competition from Luxembourg, Ireland and Hong Kong.

Daniel Godfrey, chief executive of the UK’s Investment Management Association, has given a warm welcome to the latest proposals, saying that government and fund management industry are now “singing together from the same hymn sheet”.

But observers note that plans to scrap the 50 basis-point stamp duty levied on the redemption of units in UK domiciled funds – a step intended to level the playing field with Ireland – were proposed jointly by the IMA and KPMG as early as October 2006.

Shiv Taneja, managing director at Cerulli Associates, a fund consultancy, says the government’s proposals are “long in aspiration and short in detail”.

He believes that the latest UK initiative is unlikely to prove “a game changer” as it aspires only to match services already available in Dublin and Luxembourg, jurisdictions that have “worn out their shoe leather” in their efforts to welcome overseas fund managers.

A key aim of the government’s latest initiative is to reverse the decline in the UK’s popularity as a fund domicile. This repeats ambitions expressed by the previous Labour government in a 2009 report, “Asset management: the UK as a global centre”.

In that, Robert Jenkins, then chairman of the IMA and a current member of the Financial Policy Committee, said the UK should aim to become the “domicile of choice” for investment funds, adding that “Dublin and Luxembourg believe passionately that their fiscal policies toward fund activity accrue benefit to the nation as a whole”.

John Everett, a principal with Bovill, a regulatory consultancy, and former head of the funds unit at the Financial Services Authority, says the UK’s latest strategy report is altogether more substantial than the 2009 analysis as it contains far more definite commitments that should improve competitiveness.

But Marc Saluzzi, chairman of the Association of the Luxembourg Fund Industry, says Britain is “coming to the game late”.

“It is a fashionable ambition for governments to establish their countries as an international fund centre as there are considerable economic benefits for those that can succeed,” says Mr Saluzzi.

According to the IMA, every £1bn of funds domiciled in the UK brings around £900 in tax revenues. However, Mr Everett says the UK Treasury and tax authorities recognise that benefits go beyond direct tax revenues.

The funds industry in Luxembourg employs around 14,000, while the Irish Funds Industry Association says 12,000 are directly employed by the fund domicile. Jobs are also created in catering, cleaning and security.

The UK government estimates that around half the 32,300 people directly employed by the investment management industry are currently working in jobs closely linked to fund domiciliation.

Mr Saluzzi notes that countries such as Brazil and Chile, which in common with the UK have large established asset management industries, also want to develop into international fund centres.

“History shows that this is not an easy challenge to meet. Those fund centres that have thrived are not necessarily those which are also large asset management centres,” he cautions.

He argues that fund regulations and tax laws in Germany, France and the UK have been framed for domestic investors and do not suit the needs of the export market.

Another issue for the UK is to ensure the effective implementation of Europe’s alternative investment fund managers directive. About £100bn in hedge fund assets is predicted to move onshore once the AIFM directive comes into force in July.

Stuart Chalcraft, associate partner at Ernst & Young, the professional services firm, says the UK will need to make tax changes to create a true hedge fund vehicle that can compete with those domiciled in the Cayman Islands. He says that if the UK did create a tax-exempt onshore hedge fund structure along the lines of the Specialised Investment Fund regime in Luxembourg or the Qualifying Investor Fund in Ireland, this would be adopted rapidly.

But Mr Saluzzi cautions that all of the established fund centres are targeting hedge fund managers operating from the Cayman Islands. The UK will face fierce competition for that business, he says.

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