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Charles Schwab eyes UK rollout for US-domiciled ETFs

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US financial services giant Charles Schwab is “closely” watching the UK regulatory landscape in the hope of distributing its US-domiciled exchange traded funds into the market later this year.

The Financial Conduct Authority, the UK regulator, consulted with asset managers earlier this year on plans for its post-Brexit overseas funds regime, which will allow fund managers to apply to sell non-UK funds to UK investors.

Schwab Asset Management, the company’s fund arm and one of the largest ETF providers in the US, said there was “a tremendous amount of interest” in US ETFs among UK investors.

“[We] are watching the regulatory landscape closely to see what may be feasible in the coming months,” a company spokesperson said.

The firm is the largest US ETF provider that does not offer equivalent Ucits funds, managing ETF assets of $343bn at the end of March, Morningstar data shows.

Schwab AM also sees interest in US ETFs among investors in other international markets, including the EU.

“The differences between the regulatory landscape in the EU compared to the UK suggest a rollout later this year is more likely to be feasible in the UK,” the spokesperson said.

Schwab AM currently has no plans to launch Europe-domiciled ETFs, but the firm is “always monitoring and evaluating new products and services based on client feedback”.

EU rules effectively prevent fund managers from selling US ETFs to European retail investors. European regulations include a requirement for funds to provide critical information documents, which US funds do not publish.

Raza Naeem, partner at law firm Linklaters, said UK distribution of US-based ETFs is only likely to be possible if the UK grants equivalence to US funds under its post-Brexit overseas funds regime.

The FCA held a consultation earlier this year on the forthcoming regime, which will allow asset managers to apply to sell non-UK funds to local investors. This would depend on the UK Treasury deeming the regulatory environment in overseas fund centres to be equivalent to UK rules.

The UK government has found European Economic Area states to be equivalent under the OFR, meaning European Ucits funds can apply to use the regime.

Naeem said he had not heard if there was a possibility that the UK may make the same determination for US funds.

But Gavin Haran, head of policy for asset management at law firm Macfarlanes, said there were “good reasons” to expect that it would happen.

“A positive equivalence decision is likely because UK investors will want to invest in US ETFs and the standard of regulation in the US is high,” he said.

Haran added that US ETF managers that have Irish fund structures for their US strategies are likely to benefit from the OFR soon, which he said could put pressure on the UK to allow US ETFs to access the regime directly from the US.

However, he said this change was unlikely to happen this year.

“The FCA is busy dealing with applications from the 8,000 Ucits that will be eligible for the OFR from the outset,” he said.

“The government will be busy with the general election and there might be a changing of the guard,” he added.

Meanwhile, Haran said there were other “uncertainties” surrounding potential additional regulations the UK might impose on US funds.

The FCA is also considering whether ETFs should be subject to a specific application and notification regime under the OFR, he said.

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