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.