It’s hard not to get lost in the day to day politics of Brexit.
Put simply, post withdrawal, the relationship between the UK and the EU27 will be very different to how it is today.
We can’t ignore the fact that Brexit is hugely political and whilst we see lots of pressure coming from bodies such ESMA, the EBA and EIOPA, the real power and decision making authority rests with the politicians.
For asset managers, what’s critical is being able to navigate Brexit, with as little disruption on their businesses as possible and ultimately to ensure they can continue to market and distribute their fund products across the EU, post March 2019.
With so much uncertainty surrounding the type of Brexit deal that will be negotiated, some managers have long been planning for a hard Brexit and have kicked off the process of establishing management company subsidiaries in different EU member states.
This makes sense. With no deal on the table, UK managers will:
On the surface, the first two challenges can be readily dealt with. The creation of capitalised EU subsidiaries will facilitate access to the European market and existing UK Fund structures can be cloned into EU domiciled structures.
The principal area of difficulty is the delegation and outsourcing of activities back into the UK.
Over the past few years, regulators right across Europe have been tightening their rules in this respect.
Firms need to be conscious of this and to carefully think through the roles and functions they are looking to establish within their EU Subsidiaries, so as to ensure that they land on the ground with sufficient substance.
Some domiciles like Luxembourg have introduced thresholds on the staffing numbers firms are required to have. In Ireland, the CBI have been silent on this, indicating that substance will be linked to the nature, scale and complexity of the authorisations being sought.
Once staffing numbers have been determined, there are also practical issues to be addressed, namely, where will the people required for newly created roles and functions come from. My expectation is that some executives will relocate from the UK, however I also expect competition for local talent and for wage inflation to intensify in the short term for key roles.
There is another side to all of this, and that is to ensure that European Managers and European Products can be facilitated access back into the UK market. Approximately, 25% of EU domiciled funds are currently sold into the UK. In Ireland alone, over €500bn of Irish Domiciled Funds are owned by British Investors. Post-Brexit, these distribution arrangements will be under threat as well. This is not a one sided negotiation.
So how will this all play out?
Over the past nine months, both the FCA and the UK treasury have been signalling a temporary permissions regime, which is expected to allow EU firms to continue to sell and distribute their funds into the UK for a defined period.
Notwithstanding all the politics, I’m also hopeful that the EU will allow for a transitional period post March 2019, in order to allow for some of the finer details to be ironed out.
In terms of delegating functions back to the UK, cooperation agreements, between the UK and member states will be required. In this respect, ESMA have already been signalling that they are close to wrapping up discussions which will allow for these.
Longer term, I think it’s possible that the UK may look for equivalence across asset management. Bearing in mind that the UK currently is equivalent, in that they have adopted and applied all necessary EU laws and regulations, other than politics, there’s no reason why the UK would not pass an equivalence test.
One of the difficulties with equivalence is that it comes with risk, in that it can be revoked at short notice and it’s also not very widely used.
Coupled with this, for the UK industry to maintain equivalence, they would need to adopt new EU rules as and when they come into force, with no ability to influence the legislative process. This would be somewhat at odds with the flexible and autonomous regime the UK have talked about having in place post-Brexit, so from a political point of view, this could be a tough sell.
Plenty of uncertainty still exists and there’s no doubt that we’re in for a bumpy few years to come. Outside of the UK opportunities do exist and we have witnessed member states across the EU lay on a charm offensive for a bigger slice of the UK’s financial services industry.
So let’s end with one thought, and that is, that here in Ireland, we should, at the very least be seen to be, as charming and as welcoming as any of our EU neighbours.
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