* EU guidance casts uncertainty over 'delegation' post-Brexit
* Delegation allows UK-based firms to manage assets in Europe
* Graphic-UK and EU financial services: http://tmsnrt.rs/2uQyqtG
LONDON, July 27 (Reuters) - British-based investment firms' long-standing ability to manage billions of euros of assets elsewhere in Europe could be threatened by Brexit, new EU guidance suggests.
Asset managers in London oversee funds worth 1.2 trillion euros ($1.4 trillion) in the EU - more than their peers in France, Germany and Italy combined, according to figures from UK industry body the Investment Association.
Previously, many mangers had said they expected the impact of Brexit on their operations would be minimal compared with the reorganisations faced by many international banks and insurers.
But now EU regulators have issued guidance on how they plan to scrutinise "delegation" - a manager in one country overseeing assets in another - after Britain leaves the bloc in 2019.
The guidance is aimed at preventing investment firms setting up "empty shell" subsidiaries in an EU country, to allow them to continue serving European clients, but leaving the bulk of their management staff and operations in London.
Any new subsidiaries must not delegate tasks to another country to an extent that exceeds by a "substantial" margin the tasks that will be carried out locally, the European Securities and Markets Authority (ESMA) said. Portfolio and risk management cannot be delegated entirely.
There is room for interpretation in terms of what constitutes a "substantial" margin, but without delegation asset managers would have to relocate operations to the EU to manage funds from there, driving up costs.
The ESMA policies raise the question of whether decades of delegation arrangements should be called into question, said Leonard Ng, a lawyer at Sidley Austin.
The guidance was handed to national regulators this month, to stop them offering "light-touch" deals to win a slice of the UK financial services market, Europe's biggest.
ESMA said it did not spell an end to delegation. "It means that each situation has to be assessed on a case-by-case basis, based on the issued outlined in the opinion," said a spokesman for the Paris-based EU agency.
But Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), which regulates funds in Britain, made it clear ESMA's opinion was a threat to the delegation model.
"This is a model that works effectively," Bailey told reporters this month. "There is no need for it to change. I would put the question back to my ESMA colleagues, 'Why do you think Brexit requires these changes?'."
The UK Investment Association declined to comment.
But several fund firm executives, who declined to be named due to the sensitivity of the matter, told Reuters they feared that delegation would be restricted after Brexit. They said this could result in firms leaving London for countries such as France, which has been among those pushing hardest to attract asset managers.
Apart from fund management, EU countries are also eyeing other parts of Britain's financial sector after Brexit, such as the clearing of euro-denominated transactions and primary dealers in government bonds.
While the ESMA guidance is not legally binding, all national regulators will be expected to apply it. Britain's FCA has previously required asset managers to spell out their Brexit contingency plans, including if there is no delegation.
Maarten Slendebroek, chief executive at Jupiter Fund Management, which manages a number of Europe-focused funds out of London, said his company was planning to set up a separate management company in the EU - although it had yet to decide which country to pick.
"With that, I think we will overcome the challenges with regard to delegation rules," he added.
Asset manager M&G has already said it will set up a new unit in Luxembourg, a top centre for fund listings.
AMF, the French markets watchdog and ESMA member, said delegation should not be allowed without an asset manager having a substantial presence locally.
"We are vigilant that entities based in France or in Europe wishing to delegate will have sufficient means to control all investments delegated. In that respect, we welcome the opinion released by ESMA," the AMF told Reuters.
Jean-Louis Laurens, an "ambassador" for the French asset management sector, estimated that 5,000 to 10,000 asset management jobs will eventually move from London to the EU.
"In France, we want to attract the money managers and analysts," he said.
Nicolas Mackel, chief executive of Luxembourg for Finance, which promotes the Grand Duchy as a financial centre, said the guidance was aimed at a United Kingdom with no EU trading terms in 2019, something he did not expect.
Peter Astleford, a lawyer at Dechert who provides advice to fund managers, said that while the ability to delegate was not yet under direct threat, the guidance meant that the minimum investment and infrastructure that firms would require to set up new subsidiaries was being increased.
This could encourage them to hire less experienced staff and offer fewer products to investors in the EU, he said.
ESMA's policies could also lead to pressure for funds to be managed in the country where their customers are based, some industry officials said. That would have global repercussions as U.S. managers also run funds in the EU.
"By targeting the UK, ESMA is forcing supervisors to take a harder line on all non-EU entities," said Philip Spyropoulos, senior financial services associate at law firm Eversheds Sutherland.
($1 = 0.8553 euros)
(Additional reporting by Andrew MacAskill in London and Maya Nikolaeva in Paris; Editing by Pravin Char)