Brexit: Leaving the EU threatens fund passport
Britain’s historic vote to leave the EU threatens to disrupt fund sales by UK managers across Europe, curtailing future asset growth and damaging profits.
Some lawyers and analysts fear that the City will be damaged by the loss of “passporting” privileges that allow UK financial institutions to access the EU single market without restrictions.
Most UK asset managers have bases in Luxembourg or Dublin for their mutual fund ranges and will — in theory — still be able to sell these funds, known as
Ucits, to the EU market after Brexit.
That is not a foregone conclusion, however. Haley Tam, an analyst at Citigroup, the bank, in London, says Brussels could choose to introduce tougher rules that would require funds domiciled in Dublin and Luxembourg but run by UK managers to be subject to more onerous rules.
“The EU could require investment management and support staff to be based in the country of domicile,” says Ms Tam.
Citigroup last week reduced its earnings forecast for the listed UK asset managers sector by 5.8 per cent for next year and 7.9 per cent for 2018. It cited concerns that costs will rise as asset managers have to deal with different regulatory standards in the UK and EU.
M&G, the investment arm of Prudential, the insurer, has already begun
setting up a new range of funds in Irelandto sell to European investors.
Dominic Johnson, chairman of New City Initiative, the think-tank, fears that any requirements for UK managers to move staff into the EU will completely change London’s historic role as the capital of asset management in Europe.
He is particularly concerned about the potential impact on small managers.
“A boutique with 20 employees in London will find it very hard to open offices elsewhere in Europe,” says Mr Johnson, a long-time critic of the EU.
He likens asset management in the UK and EU to twins that were joined at birth and warns that “separation will not be an easy process”.
But Mr Johnson expects fund managers based in Europe to voice support for dual passporting arrangements to ensure their continued access to clients in the UK.
“The last thing that continental European managers want is to be cut off from the UK. Beggar thy neighbour policies can only hurt consumers and savers across Europe,” he says.
Around £1.2tn in assets are managed by fund managers based in Britain on behalf of European investors.
Some observers believe the UK could use
Norway as a modelfor a new relationship with the EU. This would allow the UK financial services industry continued access to the EU market. But Norway pays contributions to the EU budget and allows significant free movement of people into the country, policies that have been rejected by many supporters of the UK
Brexitcampaign.
The last thing that continental European managers want is to be cut off from the UK
Rachel Kent, global head of the financial services practice at Hogan Lovells, the law firm, says access to the single market will come at a price and that it will be impossible for the UK to cherry pick favourable aspects of the existing rules.
“The EU is not going to say the UK can have full passporting rights, but don’t worry about the free movement of people or contributions to the EU budget. We can’t expect to have everything we want,” she says.
Gerard Lyons, who was the economic adviser to Boris Johnson, the former mayor of London, is a critic of the current passporting system, which he says “did not work all that well” for many UK asset managers.
Leaving the EU will allow UK fund managers to benefit from less intrusion by European regulators into their domestic market where the bulk of their business is done, says Mr Lyons.
He believes that a “bespoke relationship” will have to be worked out for the UK that permits access to, rather than membership of, the single market.
In contrast, Sadiq Khan, the current London mayor, has warned that the loss of passporting rights would be “a disaster”. He has promised to push the UK government to make sure passporting is at the top of its priority list during Brexit negotiations.
Owen Lysak, senior associate in London at Clifford Chance, the law firm, says it is vital for the UK asset management industry to construct “a shopping list of priorities”. “Passporting will be the first item on that list,” he says.
One possible result of any negotiations is that the UK will become classified as a so-called third party in its dealings with the EU. This would require the UK to maintain a regulatory environment that is at least equivalent to that of the EU in order to be permitted to continue to do business with EU entities.
Jake Green, a partner at Ashurst, the law firm, fears that obtaining an equivalence decision could be an “acutely political” discussion. He also notes that there is no equivalence regime in place for Ucits funds at the moment. (From FT -
https://next.ft.com/content/6c5337d6-3df8-11e6-9f2c-36b487ebd80a Posted article due to paywall)
An interesting read about one of the potential challenges and trade offs we face, especially as a financial and service economy.
