Brexit: what should UK asset managers do?
The Overriding principles is that the outcome and related impact cannot be predicted with certainty. There is no need for rash decisions, however it is worth considering the key questions that UK asset managers should be asking themselves. Even if UK voters chose to leave the EU on the 23rd June referendum, little will change over the short to medium term. UK-based asset managers will still be able to distribute their funds in the short-term, while considering strategic solutions for the future.
No change until mid-2018
Opinion polls are currently tipping the result to “remain”, but a lot could happen in the final weeks of the campaign. Prime Minister David Cameron has promised that a “leave” vote would see the UK apply immediately for withdrawal from the European Union. EU treaties foresee a two-year transition period during which existing arrangements would stay in place whilst a new relationship is negotiated. Thus it is envisaged that current rules would be in place at least until 24th June 2018.
Question marks thereafter
Things might become more complicated thereafter. Most UK asset managers reach EU-based investors through cross-border distribution specialists outside the UK. Whether this would continue long term depends on how the severance negotiations unfold, a process which could be somewhat torturous given how intertwined the UK has become with the EU.
No more passporting from the UK?
In the short term, outside the EU single market, UK asset managers with UK domiciled UCITS
products selling to a domestic market should see no real change and it is unclear as to the immediate impact on these funds for passporting into Europe. While the UK’s participation under the 3rd country regime would solve this concern, the timeline for this initiative is also uncertain. A solution would be to establish a UCITS vehicle via a third-party management company
in Luxembourg or another member state, with administration and distribution handled from its host member state. This is a model commonly used by US funds, who access the EU market in this fashion.
Likewise, an alternative investment fund manager would no longer be authorised to market its EU AIF
under the AIFMD
passport regime. The UK would have to negotiate access to the passport under the third country regime. Again, the most practical solution could be to appoint a Luxembourg or Irish AIFM
, with the portfolio management delegated back to the UK, particularly for new fund launches.
Continued access like that of US funds?
Given that few UK-based UCITS are distributed outside the UK, many managers are not particularly concerned, especially as the UK domestic market is large and growing. As for accessing EU investor, they point to the market access enjoyed by Swiss and US players using a Luxembourg hub as examples of how things would continue. UK funds currently manage more than one-third of all assets in Europe, and Britain has the fifth biggest economy in the world. Given this, there is a this view, it would not be in the interest of the remaining 27 member states to deny themselves continued smooth access to the associated capital and services supplied by British-based asset managers. Moreover, just as UCITS funds are winning market share in Asia and South America, a free-trade focused UK would welcome their sale too.
Or could the EU be protectionist?
The contrary view is that politics could disrupt this benign scenario. The UK would be the first country to leave the Union, and the remaining members and the European Commission could seek to discourage others from having similar ideas. Britain could not be seen to enjoy the upsides of the single market while avoiding perceived disadvantages. The EU might seek to find ways to encourage or oblige asset management operations to move “onshore” from London, Edinburgh, Leeds and other UK based operational hubs. Even if this dislocation and extra cost would hurt the remaining EU countries, politics might force their hands. For example, the AIFMD was passed in 2011, but it has only been since 1st January 2016 that Swiss asset managers can acquire a marketing passport to sell AIFs throughout the EU. Things might be made even more complicated for UK asset managers.
Luxembourg and FundRock – a good combination
What will not change after 23rd June, however, is that Luxembourg will remain the leading cross-border domicile thanks to its stable social and political environment, modern legal and regulatory framework, strong culture of investor protection and rigorous anti money-laundering policies. Luxembourg is geographically well positioned in the centre of Europe and has a well-established multi-lingual funds industry infrastructure.
FundRock is the leading 3rd party Management Company in Luxembourg with extensive European experience and in-depth knowledge of the UK fund landscape, garnered through first-hand experience of having been previously part of the RBS group. So whether it’s Brexit or Bremain after 23rd June FundRock Management Company S.A. is ideally placed to help UK fund managers find solutions for their European fund needs.