• Swiss fund industry fears exclusion from EU funds market, calls for financial services agreement with EU
  • Swiss hedge fund managers fear AIFM Directive will restrict them from selling to EU-based investors
  • Higher UK Tax rates driving some London-based hedge fund managers to move to Switzerland

In a letter to members, the Swiss Funds Association (SFA) argues that Switzerland needs to reach a financial services agreement with the EU to ensure its fund industry is not excluded from the EU fund management market.

In the 1990s, the Swiss fund industry lost much of its business to EU locations including Luxembourg and Dublin after it voted not to join the European Economic Area (EEA). In particular, it had no access to the market created by the EU UCITS (Undertakings for Collective Investment in Transferable Securities) Directive, which enabled retail funds authorised in one member state to be marketed throughout Europe (the so-called passport system). Today, about three-quarters of the €6.8 trillion invested in collective investments is placed in UCITS funds, according to the European Fund and Asset Management Association.

The SFA's concern has been heightened because of the proposed EU Directive on Alternative Investment Fund Managers (AIFM), which will introduce a similar passporting system to the UCITS Directive.

Outlining its concerns in a recent white paper, the SFA said that, as currently drafted, the AIFM Directive would prevent any delegation of asset management to third countries like Switzerland, severely limiting investor choice. Similarly, the SFA criticised proposals that would severely restrict Swiss-based hedge managers from selling their products to EU investors.

The SFA says that "remaining on the outside" of the current regulatory framework will "only cause the situation to deteriorate further" and the threat of an "exodus" of value creation and highly qualified jobs from Switzerland is becoming "ever more pressing."

Despite the SFA's concerns, some London-based hedge fund managers have moved to Switzerland to take advantage of the significantly lower tax rates. This trend has accelerated since the change in the tax regime for non-domiciles and, more recently, the announcement of a new 50% tax rate for high earners.

A number of Swiss cantons have been aggressively targeting hedge fund managers. Representatives from several cantons took part in a seminar last month in London's Mayfair aimed at attracting more hedge funds to relocate.

The tax position in Switzerland is complex because of different tax rates levied at federal, canton and local levels— according to a report by KPMG earlier this year, the effective tax rate for hedge funds in Switzerland can vary from 16% to 27%.

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