Huw Jones

LONDON, (Reuters) – The 21 trillion-euro ($24 trillion) European Union mutual fund sector will be under greater scrutiny for how it assigns stock picking tasks to outside managers. A draft EU document was released on Thursday.

London-based asset managers manage funds in Luxembourg and Dublin. However, Brussels is concerned that it may end up with entities “letter boxes” run by outsiders after Britain leaves the EU.

Although the EU’s executive European Commission had been reviewing separate rules for managers of alternative investment funds like hedge funds and was preparing reform proposals, it will be revealed next Tuesday.

According to the draft, “The proposal seeks a coherent approach to delegation activities of European investment fund manager and supervisors.”

According to it, there are inconsistencies between national approaches to delegating stock selection which may lead the investor protection level to be lower.

It stated that additional measures were needed in order to make sure funds are sufficient for staff within the bloc.

According to it, both alternative investments funds and mutual funds are being reformed on delegation, liquidity risk management, market monitoring data reporting, and regulation of custodians.

A UCITS fund must justify the “entire delegation structure based upon objective reasons”

Additionally, the European Commission will establish conditions for delegation. It will determine when a EU-based fund company is considered “letter box entities” and should take appropriate action from regulators.

The proposals will require approval by the European Parliament, EU states and ESMA, the EU’s market watchdog ESMA, to play a key role in monitoring delegation.

($1 = 0.8821 euros)