Ahead of Chancellor Jeremy Hunt’s uninspiring British ISA announcement, the UK government was approached with proposals to build a post-Brexit ETF regime to rival Ireland and UCITS and drive assets into unloved British securities.
To-date, only one ETF has been domiciled in the UK – the Commerzbank CCBI RQFII Money Market UCITS ETF – launched by a partnership between the China Construction Bank, Euroclear and Commerzbank in 2015.
Seven months before stepping down as CEO at the Investment Association, Daniel Godfrey, responded: “The launch of the first UK-domiciled ETF shows that with the right tax and regulatory environment, the UK has become an attractive and competitive fund domicile.”
Nine years later and it appears asset managers have not shared this sentiment. In fact, the UK is currently wrestling with allowing existing and future UCITS ETFs to continue passporting to the country through the long-awaited Overseas Funds Regime (OFR).
Meanwhile, the war for ETF domicile market share appears to have been won by Ireland, whose preferential treatment by the US on equity dividend withholding tax has seen it become home to 70% of UCITS ETF assets.
However, the UK should not content itself with its currently minor role within ETF administration, according to Hector McNeil (pictured), co-founder and co-CEO of HANetf, who proposed a two-part solution to the Department for Business and Trade.
UK to supercharge itself
The first piece of the puzzle focuses on making UK ETF domiciling make sense for asset managers and investors.
Whereas Ireland benefits from its Double Taxation Treaty with the US, halving the rate of withholding tax paid by investors in Dublin-domiciled US equity fund dividends – from 30% to 15%, or even 0% for some synthetic ETFs – the UK could offer a similar arrangement for UK-domiciled ETFs investing in UK equities.
“The government should offer UK equity-focused ETFs to be tax-free on gains and income, if held for a decent holding period,” McNeil added.
“Also, any creations of new physical ETF units should be stamp duty free, as stamp duty is currently charged on UK equity ETF creations. These steps would encourage inward investment and more listings on the London Stock Exchange (LSE).”
On the latter point, he noted an additional condition for UK domiciling could be that ETFs would have to have an LSE listing alongside the option of listing on other venues.
For ETF issuers, McNeil advocated for additional tax incentives to domicile ETFs in the UK for those with a “significant presence” to encourage repatriation and employment.
He noted this should follow this Irish model of ‘substance for licencing’, which means “boots on the ground and not just name-plate”, he said.
Post-Brexit UCITS rival
The perhaps more ambitious – or for some unattainable – second measure McNeil proposed is a UK ETF regulatory regime to rival the EU’s celebrated UCITS.
“There are so few Brexit benefits but this could actually be one,” he continued. “The UK could create its own structure away from UCITS whereas being part of the EU, they could not do that before.”
Looking to mainland Europe for a case study, McNeil noted Switzerland operates a model whereby UCITS are listed and traded within the country alongside ETFs abiding by its own regulatory regime.
The key, he suggested, would be for a UK ETF regulation to incorporate areas outlawed by UCITS. For instance, offering exposures to single precious metals, equities and bonds, partial crypto, higher leverage caps and semi and non-transparent active management within the UK ETF wrapper.
Whether such proposals will be implemented in-part of in full – or whether ETFs would subsequently launch and gather assets – are all big questions with distant answers.
However, the idea of governments supporting ETF industry expansion and product development to contrive their desired outcomes is not entirely far-fetched. In fact, the Peruvian government announced it would be launching a tax-exempt sovereign debt ETF to bolster its fiscal resource.
McNeil stated he plans to share his proposals with Labour Shadow Chancellor Rachel Reeves.
