The comments from Mark Seaman, a principal consultant at Etheios with a 25-year City of London background, followed a report called Taxation and the Competiveness of UK Funds. It warns that the UK fund administration industry faces a “tipping point” unless urgent action is taken.
Mr Seaman said the findings of the report, produced on behalf of the Investment Management Association (IMA), were “quite serious”.
“What it indicates is that the over the last five years we’ve lost around 20 per cent of the funds, which should have been sold in the UK, by UK-based companies,” Mr Seaman said. “Effectively these have been sold elsewhere in places like Luxembourg and Dublin.”
The consultant reveals his own career on fund administration assignments has very much “mirrored” the way the industry has shifted since 2001. “Nowadays my work is probably 50 per cent based in Luxembourg and Dublin…with the rest in the UK.” Five years ago he says that was “zero per cent” in Luxembourg and 1 per cent in Dublin.
By contrast to the plight of the UK fund administration sector, Dublin’s International Financial Services Centre (IFSC) is expected to see 9 per cent more staff added this year on a recently estimated figure of 10,700 employees. Established in 1987 with EU approval, the centre now contributes around €700m per annum in corporation tax to the Irish government.
Since January 2006, a corporation tax rate of 12.5 per cent has been applied to companies based in the IFSC. This is well below the corporation tax rate of many of Ireland’s European competitors. Seeking to copy Dublin, several new EU states in eastern and central Europe have slashed their tax rates. With the exception of registration duty and annual subscription tax of 0.05 per cent, funds in Luxembourg are exempt from local income and capital taxes.
In contrast, authorised funds in the UK are subject to taxation in accordance with the general rules of companies at the lower rate (presently 20 per cent).
Mr Seaman, commenting on the potential for eastern Europe, says: “Poland has the potential to be a fund administration centre in the long term since there is some fund expertise there, although only with regard to domestic funds.”
That said, the Polish “potential” lies in the fact that operational costs are significantly lower than in Ireland, Luxembourg or indeed the UK. Generally speaking, around half of total costs of fund administration are related to staff costs, with the remainder being IT related.
Over the last two years net sales of non-UK funds grew from 1 per cent to 20 per cent of the UK market, while sales of UK funds broadly remain very low, the report found.
Mr Seaman believes the trend is set to continue and likely “to get worse”, particularly as funds evolve in complexity. That has significant implications, since many of the jobs that form the asset management value chain go alongside fund domicile. So support service jobs are threatened.
In terms of UK fund administration presences under threat, Manchester, Edinburgh and various points in Essex are likely to be under the microscope. But the extent of damage to regional economic prospects is more difficult to gauge.
With fund administration expertise being “very strong” in the UK, Mr Seaman argues that the price of administration (and administrators) outside London could “probably” be less overall than say Luxembourg or Dublin.
Having direct experience of the ABN Amro Mellon and Mellon Fund Administration operations in Brentwood and the IFDS operation in Basildon, Mr Seaman notes that in respect of the former, that: “Their Luxembourg operation has considerably expanded recently.”
RA
