While U.K.'s formal exit from the European Union is two years away, supervisory authorities in London and on the Continent are preparing for what comes next for money managers.
A year after the June 23, 2016, referendum, the industry's focus seems to be shifting away from an assumption that passporting rights will be a certain outcome for London firms to other alternatives, sources said, including the potential need to relocate staff and activities out of the U.K.
Money managers recognize the difficulties they will face should there be a lack of agreement on passporting rights or regulatory equivalence. And sources warned that there is a much stronger likelihood of a lack of agreement due to a tight negotiation schedule.
Phil Poole, global head of research and member of the Deutsche Asset Management CIO executive committee in London, said in a telephone interview: “Without passporting or agreement on regulatory equivalence, after Brexit U.K. firms will need EU representation to operate in EU member states.”
“In an analogous situation, under certain circumstances, an asset management client in Thailand could be covered by specialist sales from a regional hub like Singapore, but in order to meet such clients in Bangkok, (the executive) would need to be chaperoned by someone from the local office for regulatory purposes,” Mr. Poole said.
“Doing business in Europe, post-Brexit, similarly is likely to require an executive from an EU-regulated entity to accompany a U.K.-based manager when meeting an EU client,” Mr. Poole said.
A relocation to, or creating a subsidiary in, an EU member state may be the most cost efficient if not the only option for many money managers if they want to retain their European clients.According to the U.K. Investment Association, European clients constitute more than half of U.K. overseas business. U.K. managers run £2.2 trillion ($2.8 trillion) out of £5.7 trillion total assets for overseas clients.
Some £1.2 trillion of these overseas assets belong to European investors.
Although the terms of Brexit are yet to be agreed on, the European Securities and Markets Authority already published a non-binding opinion,on May 31, containing a wish list of requirements that U.K. firms will need to meet to continue to operate in the EU.
ESMA said the opinion was published due to “increased volume of requests from U.K. financial market participants seeking to relocate to the EU27.”
ESMA's statement confirmed that firms relocating to EU countries will need to be compliant with the most important European regulations including the Alternative Investment Fund Managers Directive, Undertakings for Collective Investment in Transferable Securities Directive and the Markets in Financial Instruments directives, MiFID I and MiFID II.
The European regulator also warned that U.K. firms will need to obtain new permissions to operate in the European market after Brexit.
“Outsourcing or delegation arrangements, under which entities confer either a substantial degree of activities or critical functions to other entities, should not result in those entities becoming letterbox entities nor in creating obstacles to effective and efficient supervision and enforcement,” the ESMA statement said.
In late May, the Financial Conduct Authority in the U.K. separately asked U.K. money managers to share their contingency plans after Brexit becomes reality.
The FCA's spokesman said in a statement: “It is important for us as supervisors to understand the plans that our regulated firms have regarding Brexit.”
Sheila Nicoll, head of public policy at Schroders in London, commented in an email: “Like other financial services institutions, our overall aim, through Brexit and beyond, is to continue to offer a high-quality, cost-effective service to our clients. We would like to do this in the most friction-free way for them as possible.”