U.S.-Domiciled ETFs Could Be Granted Equivalence in U.K.

Charles Schwab AM is "closely" watching the U.K. regulatory landscape.

Reviewed by: etf.com Staff
Edited by: James Rubin

ETFs domiciled in the U.S. could be granted equivalence under the U.K. government’s Overseas Fund Regime (OFR) in a move that would open the market to U.S.-listed ETFs.

The Financial Conduct Authority (FCA) launched a consultation with asset managers last December on how products should be recognized under the post-Brexit framework.

The U.K. government granted equivalence for all UCITS vehicles in the European Economic Area (EEA) in January, with U.S.-listed "40 Act" ETFs also being considered.

Any move would need to be approved by the U.K. Treasury deeming the regulatory regime for the overseas fund to be equivalent to the U.K.

U.S.-listed ETFs are not currently available for sale under EU law as they do not publish certain documents required by the European and Securities Markets Association (ESMA).

Charles Schwab Asset Management, which does not currently have any ETFs registered for sale in Europe, said it is watching regulatory developments in the U.K.

A spokesperson said: “When it comes to offering U.S. ETFs broadly to our clients in the U.K., we know there is a tremendous amount of interest and are watching the regulatory landscape closely to see what may be feasible in the future.”

A Question of Timing

Gavin Haran, head of policy for asset management at Macfarlanes, believes U.S.-domiciled ETF equivalence is likely, but not for some time.

“There are still a few steps to think about before onshore U.S. funds will be sold to U.K. retail investors,” he said.

“We will get to U.S. ETFs being on the OFR. There are just various hoops to jump through and questions to be decided before we get to that point. It is not going to happen tomorrow.”

Despite interest from Charles Schwab AM, Haran said U.S. issuers may prefer the tried and tested route of domiciling ETFs in Ireland and using the OFR to passport into the U.K. over being directed straight to the U.K.

“It depends on how the player wants to deal with the regulation,” he said. “How do you want to sell your products in the UK?”

Emma Garnham, senior associate at Macfarlanes, added Ireland’s favorable tax treaty with the U.S. may also be a reason asset managers will look to domicile there over targeting the U.K. directly.

“With OFR nearly up and running [Ireland] becomes an easy pipeline for U.S. managers compared to waiting and hoping for U.S. equivalence to come through.”

The Treasury’s granting of equivalence for UCITS vehicles was warmly welcomed by the industry and was touted as cementing the “U.K.’s place as the leading global center for investment management.”

This story first appeared in etf.com's sister publication, ETFStream.com.

Theo Andrew joined ETF Stream as a senior reporter in September 2021. He has over four years of investment writing experience spanning pensions and retail investments, most recently at Citywire, where he was a senior reporter covering environmental, social and governance investing.