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Money Management

Regulation puts U.K.-based money managers at risk of losing EU business

Managers could run afoul of EU portfolio management rules

Jean-Louis Laurens
Jean-Louis Laurens thinks portfolio managers should be based near their markets.

U.K.-based money managers are facing yet another Brexit-related question: Will they be able to serve European Union institutional clients without an EU presence? Sources said that issue might motivate some firms to expand to or re-register in a European capital.

Negotiations on the path the U.K. will take to exit the European Union got underway June 19. Sources said current EU rules under the Institutions for Occupational Retirement Provision directives could mean money managers will be prohibited from providing portfolio management services to EU-based asset owners from the U.K. unless they authorize these services in another EU member state.

In Italy, for example, the laws on investment management are based on the IORP directives and say only Italian money managers or those established in the EU can manage assets for Italian occupational pension funds.

The implications could be huge for money managers with portfolio management operations based in the U.K. Data from the Investment Association, which represents U.K. money managers, show European clients constitute more than half of U.K. managers' overseas business, with the firms running 2.2 trillion ($2.8 trillion) on their behalf.

One money management executive has had experience with the issue, even prior to the Brexit vote. Chris Yiannakou, managing director, Europe, Middle East and Africa institutional services at Loomis Sayles Investments Ltd. in London, said his firm — a U.S. ​ affiliate of French company Natixis Global Asset Management — could not participate in a search with an occupational pension fund in Italy. The reason: While Loomis Sayles' European distribution was managed out of London, its investment management operation for the particular strategy was based in the U.S. Mr. Yiannakou would not identify the pension fund or the strategy.

Jean-Louis Laurens, newly appointed international ambassador of Paris' Association Francaise de la Gestion Financiere, which represents French money managers, said that although the industry supports delegation, portfolio managers need to be based close to the market in which they invest. "It would make sense for global equity managers to stay in London, but I hope that European pension funds will not have to withdraw their money from the U.K. because that would be a real issue for financial stability," he said.

Expansion on the bloc

Executives at a number of money management firms said they are making plans to expand their European presence ahead of the U.K.'s formal exit, although they might not completely relocate operations.

They have lots of options.

As the Brexit negotiations began, European cities commenced their own race to attract global money management firms and potentially replace London as Europe's key financial hub.

Two cities in particular are said to have the most to gain from Britain's divorce from the EU: Frankfurt and Paris. Both cities have taken steps to lure U.K.-based managers since it became clear money management firms might need to obtain new authorizations to service clients inside of the EU, even despite existing permissions.

Mr. Laurens said AFG officials and the French regulator are talking with 30 to 50 U.K.-based managers who are looking to relocate to Paris.

"Money managers will have to be present in the EU. Unfortunately, Brexit is a constraint but AMF (French financial regulator Autorite des Marches Financiers) will offer a special model allowing a fast track, two-week registration process to U.K. managers registered with the Financial Conduct Authority," Mr. Laurens said. "Additionally, AMF will offer a 17-day registration period to managers to register their products. This compares with 90 days firms need to wait to get similar approvals in the U.K. or Luxembourg," he added.

Similarly, German financial regulator Bundesanstalt fur Finanzdienstleistungsaufsicht, known as BaFin, is planning a workshop for money management firms looking to settle in Germany. The workshop, scheduled for June 27, was set to explain the authorization procedure for money management companies, delegation issues, marketing notifications from non-EU countries and investment tax issues, said a BaFin spokeswoman. The spokeswoman declined to say whether companies attending the event are U.K. firms or global firms looking for new European headquarters.

But U.K. managers say they aren't seeing France or Germany attracting the bulk of any relocated business. Some said Luxembourg and Dublin remain more desirable locations because of less strict regulation.

A spokeswoman for the U.K. office of Legg Mason (LM) Inc. (LM) said the $728 billion manager is not relocating. "We are planning to expand our presence in Dublin, but that's a larger operational decision than just for Brexit — and reflects the fact that we've got a large and growing cross-border business, in addition to a U.K. fund business."

"We plan to begin discussions with Irish authorities shortly to open an office in Dublin and to outline future plans, including applying to the Irish regulator to allow the management company to also manage our UCITS funds, applying for a license to allow our existing Irish management company to provide distribution services, contracting with separate account clients requiring an EU contracting entity and transitioning existing continental European offices to become branches of the Irish management company," she said.