HM Treasury recently published its Investment Management Strategy II Report. Building on its 2013 strategy report ‒ which mainly focused on how to improve the UK as a fund domicile ‒ this report sets out the UK government’s strategy to build upon the success of the UK’s investment management industry in the long-term.
Importantly, it highlights the robustness of the current global delegation model (for example, a fund structure comprising a UK MiFID portfolio manager). Delegation of portfolio management is said to be well-established with appropriate oversight of delegated arrangements and regulatory cooperation. It also stresses that the FCA will maintain and develop cooperative relationships with regulators worldwide to ensure that this delegation model remains the “global norm”.
Other high-level initiatives include a new UK mutual fund “based on UCITS”. Given that the UCITS directive requires UCITS to be EU-domiciled and managed, it is likely that any “UKUCITS” would be categorized as a retail AIF under the Alternative Investment Fund Managers Directive (AIFMD), and consequently would need to meet the requirements of the AIFMD’s national private placement regime or potentially be permitted as a third country passported fund, if and when such rules are switched on under the AIFMD.
The report sets out the UK government’s strategic plans to build upon the UK’s reputation as a global asset management hub including:
- Strengthening the asset management talent pipeline, including expanding the industry’s domestic and international skill base, for example through further focus on asset management centres of excellence in universities and apprenticeships.
- Harnessing financial technology solutions to ensure that UK asset managers are global leaders in fintech solutions, for example a “digital fund” using distributed ledger (i.e., blockchain) technology to reduce the need for separate back-office administration – presumably an independent depositary will still be required for oversight.
- Mainstreaming innovative investment strategies (“patient” long-term capital; social and impact investment; green finance; and Islamic finance are all mentioned).
- Continuing a coordinated programme of international engagement.
Specific measures will be further developed by the Asset Management Task Force ‒ a collaboration forum between the FCA, the government, investors and the asset management industry.
The report also highlights recent UK asset management measures, such as the UK asset management market study, intended to enhance competition, and the FCA’s recently introduced asset management authorisation hub, as well as Project Innovate where FCA helps innovators to navigate the regulatory system and reduce barriers.
In terms of tax-related proposals, the government has indicated that they “will come to a view in the Spring of 2018 whether to consult on making changes to the short-term visitors rules” (although we understand that the government will consult). In summary, employees who work in a foreign branch of a UK-based firm who make short business trips to the UK are taxed on their earnings for the time spent working in the UK, while employees from firms with foreign subsidiaries who make similar short visits to the UK are exempt from tax on their earnings under the UK’s network of double tax treaties. The government has recognised that this disparity creates an administrative burden that could be alleviated. The report also highlights the upcoming reduction in UK corporation tax from 19 to 17 percent in 2020.
The government also noted that tax and regulation regimes are important factors that asset management firms take into consideration when deciding where to locate globally, and that it is important to maintain a competitive tax regime. The government is of the view that the UK offers an attractive tax regime for its UK-domiciled funds. However, it is to be hoped that the investment management industry can secure further beneficial changes to the tax rules and enhance the range of UK funds available.