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Money Management

Brexit quagmire prompts firms to restructure their businesses

Wells Fargo’s Deirdre Flood said the firm has been ‘preparing for the worst and hoping for the best.’

Global and U.K. money managers are making structural changes to their European businesses with a no-deal Brexit still in the cards.

A Brexit outcome yielding no deal on the new trading relationship between the U.K. and EU would disrupt institutional money managers' business with EU clients unless mangers obtain a number of licenses and take apart existing fund structures to segregate EU assets ahead of time.

Under existing European Union regulation, a so-called passporting regime allows firms domiciled in member states to provide financial services across the union under a common set of rules. In the event of a no-deal Brexit, U.K. managers and the U.K. arms of global managers would be required to secure additional permissions to offer investments to EU clients or for their employees to sell regulated financial products in Europe after the U.K. leaves the union on March 29.

The U.K. government and the EU have clarified few details on a new trading agreement or rules for financial services companies since the June 23, 2016, U.K. referendum started the clock on a Brexit. "To date, no equivalence decision exists for the U.K.," Steven Maijoor, chairman of European regulator European Securities Markets Authority warned Feb. 13.

If global and U.K. investment managers want to keep such a regulatory equivalence, firms are legally required to shift parts of European assets and legal structures to continental Europe from London if they want to continue to run assets for European clients.

According to Luxembourg for Finance, the agency tasked with the development of the country's financial sector, 23 global money management firms have secured licenses in Luxembourg to date. In addition to Luxembourg, asset managers have made plans to move operations to EU countries including Ireland, France and Germany.

With the U.K. set to formally exit in 30 business days, the U.K. government is running out of time to conclude an agreement with the EU, industry sources said. And as the risk of a no-deal Brexit has grown, money managers said they have put contingency plans in place so they can smoothly continue to manage money for existing pension fund clients in the EU or future European clients.

In the last year, several global managers have set up EU-based firms in addition to their U.K.-based operations, including Wells Fargo Asset Management and Aberdeen Standard Investments. Global and U.K. managers under existing EU law — in case there is no deal altering that law — also will be required to change the domicile for fund series that are marketed to European clients and change how distribution staff who are based in London will handle client-facing activities, sources said. Managers said they have been making extensive plans for both a soft and a hard Brexit to position themselves no matter what transpires.

"We spent the last two years preparing for the worst and hoping for the best," said Deirdre Flood, head of international distribution at Wells Fargo Asset Management in London.

Ms. Flood added: "We have some clients in Europe who have asked that we register portfolio management in the European Union as they would not be able to contract with us in the event of hard Brexit with a U.K. legal entity." On Dec. 27, Commission de Surveillance du Secteur Financier, the financial regulator of Luxembourg, granted WFAM an expansion to an existing license under which WFAM could provide discretionary portfolio management and investment advisory services.

According to Ernst & Young's Financial Services Brexit Tracker, published Jan. 7, nearly half of the 143 of financial services companies monitored by EY, which includes investment banks and money managers, had stated their intentions to move some of their operations and/or staff to Europe from the U.K.

New MiFID license needed

For U.K.-based investment managers to operate in the EU they need an operation located in the EU and a new license under the markets in financial instruments directive, or MiFID II.

For Scotland-based Aberdeen Standard Investments, that meant a moving certain operations to Ireland post-Brexit.

Jennifer Richards, distribution director, Ireland, at Aberdeen Standard Investments in Dublin added: "We obtained our markets in financial instruments directive license for our Irish office just before Christmas, on Dec. 19."

Such a license guarantees that the firm's Irish branch becomes the firm's legal entity and gives Aberdeen Standard passporting rights for portfolio management and product distribution in the EU. It also gives executives permission to run assets for European clients.

"The MiFID license (held inside of the European Union) also means that all our European branches will be part of (Aberdeen Standard's) EU legal entity," rather than a U.K. entity, she said.

European asset owners aren't legally able to hire money managers with MiFID criteria only for U.K. operations, sources said.

Similarly, T. Rowe Price Investment Management had a license in Luxembourg already but the country's regulator approved an expanded license on July 17, 2018.

"Our Luxembourg entity was limited to the management of collective investment schemes. With the license extension, the company is now able to provide discretionary portfolio management services to clients of T. Rowe Price and particularly to clients within the EU," a London-based spokeswoman said.

In a hard-Brexit scenario, "branches of U.K. entity are not passportable," Wells Fargo's Ms. Flood said. Having an EU entity "safeguards" the firm, she said.

Sources said the process of obtaining such as license, depending on location, could last up to a year, so firms would have had to move on relocating much earlier.

Luxembourg for Finance said Blackstone Group LP, Janus Henderson Group PLC, T. Rowe Price Investment Management, Schroders PLC and MSF Investment Management are among the 23 global money management firms that have secured licenses in Luxembourg ahead of March 29.

Some asset owners, such as Fonds de Reserve pour les Retraites in Paris are not waiting for the outcome of Brexit. Anne-Marie Jourdan, chief legal officer at the €30 billion ($34 billion) pension fund said: "We are not worried (about contracts with existing managers) as all our managers have prepared for Brexit." But for searches launched — after the U.K. Brexit referendum — FRR is looking for new equity managers that will have a European presence after the U.K. leaves the European Union.

Managers with broad business lines, including asset classes such as private equity or real estate, will additionally have to cover the costs of an Alternative Investment Fund Managers Directive license.

Segregating assets

But money managers have other business issues beyond the need to relocate to Europe the operations for managing assets for European clients. Under a no-deal Brexit, managers also need to think about having their U.K. fund series domiciled in Europe after March 29 if they already manage European assets. EY's Brexit Tracker suggests a conservative estimate of around £800 billion ($1.05 trillion) of assets that would need to be transferred out of London due to Brexit.

But managers' circumstances aren't all the same. Managing assets for U.K. clients as well as European clients under single fund structures following a hard-Brexit deal creates an additional layer of complexity for existing fund series.

Firms that distributed funds out of a London-domiciled entity into Europe are facing the reality of stripping out the part of the offering that is targeting European clients from the rest of U.K. assets, sources said.

Aberdeen Standard's Ms. Richards said: "We were lucky. We haven't had to cut any funds in half." And "we had had a (separate) U.K.-domiciled fund range," she said.

But for M&G Prudential, around 51% of its U.K.-domiciled assets under management was owned by non-U.K. investors as of March 31, 2018. The value of the assets moving to Luxembourg is around €39 billion, a M&G spokeswoman said.

"To protect the interest of our investors, regardless of the outcome of Brexit, we have already set up a new legal and corporate structure in Luxembourg and built a SICAV (fund) platform and launched all new relevant strategies for international clients as Luxembourg-domiciled SICAVs," the spokeswoman added. (A Société d'investissement à Capital Variable, or SICAV, is a publicly traded open-end investment fund structure offered in Europe.)

Conversely, under a temporary permissions regime, guaranteed by the Financial Conduct Authority until 2022, global managers with a larger European presence do not have to replace their existing European-domiciled fund ranges just yet to offer them to U.K.-based clients. The FCA's temporary passporting time frame, however, is based on Theresa May's withdrawal deal that was rejected by the U.K. government last month.

But Ms. Flood said in a no-deal Brexit scenario, "We certainly would consider adding a U.K. fund range if needed. We haven't ruled it out." Some 35% of Wells Fargo's Luxembourg-domiciled fund series assets belong to U.K. clients.