Money managers running their European businesses out of London are facing the prospect of additional expenses from post-Brexit requirements in Europe. Adding to the uncertainty, the U.K. government must still convince Parliament to accept a withdrawal agreement with the European Union.
U.K.-based money managers spent the past two years assessing the magnitude of preparations they needed to undertake after the U.K. embarked on an exit from the EU's single market following a referendum on June 23, 2016. At a summit April 10, EU leaders granted the U.K. a second extension to complete Brexit before Oct. 31 with one caveat, that the U.K. will participate in elections to the European Parliament, which are taking place between May 23 and May 26.
The U.K. can leave the EU as soon as members of Parliament reach an agreement but if the U.K. hasn't held elections, the extension will be void on May 31, which would mean a hard exit.
These developments are adding to the ambiguity when it comes to determining the costs of Brexit for money managers.
The U.K.'s withdrawal forced managers running assets for European clients to enhance their Europe-based headquarters by obtaining new or extended permissions and split out assets managed on behalf of European clients from funds domiciled in London. At the very least, sources said, managers had to cover the cost of legal advice, with many obtaining extended licenses under the Markets in Financial Instruments Directive II for their European hubs.
Behemoths including Blackstone Group LP, Janus Henderson Group PLC, T. Rowe Price Investment Management, Schroders PLC, Aberdeen Standard Investments, Wells Fargo Asset Management, MSF Investment Management opened new offices or obtained extended licenses. David Yim, asset management partner at KPMG U.K. in London, said: "We know that 40% of U.K. money management firms are planning some form of partial relocation as a result of Brexit."
But sources said permissions and licenses are only the beginning of changes and costs that managers will be facing as part of the relocation to Europe, including revamping their distribution capabilities or reporting structures in new locations — ultimately adding to ongoing costs of running two separate businesses — one in the U.K. and one in Europe.
"At the moment, firms have also been using existing resources to manage Brexit," said Marina Cremonese, vice president and senior analyst at Moody's Investors Service. "Going forward the situation is still very fluid," she said.
Although the regulators provided some comfort by ensuring through memoranda of understanding a continuity in market operations, there is still uncertainty about what future adjustments European regulators could require, she warned.
"When you combine the cost of more people with legal and consulting fees, a midsized asset manager would comfortably be spending £1 million ($1.3 million) on Brexit preparations," Mr. Kim said. "Those firms without any existing foothold offshore could be spending much more. Every penny spent on Brexit represents an opportunity cost for investment."
Another concept that managers are grappling with is the concept of "dual hatting." Existing staff can initially hold roles in multiple locations, but six or 12 months from the Brexit date — depending on jurisdictions — these roles will need to be held by separate employees, sources said.
Specifically, in Ireland, managers are expected to name country heads.
"The Irish central bank has been flexible," said Kieran Fox, director of business development at Irish Funds Industry Association in Dublin. "What managers have had to do on Day One is less than what they will be doing in six or 12 months' time" to comply.
"In order for the manager to be authorized, individuals that fulfill different roles would have to meet certain requirements," he said. "Currently, an employee (may be) based in London but they could be fulfilling a role in Dublin for three of four days a week," he said by way of example.
After Brexit, "On Day One you could need to have 10 (staff members in Dublin) but after 12 months it will be 10+X," he said.