While Brexit is operationally becoming a smaller risk for managers that have now largely secured permissions for their companies to operate in the European Union, they say challenges remain.
Leonard Ng, partner at law firm Sidley Austin LLP in London, said the Dec. 24 agreement of a trade deal between the EU and the U.K. does not mean that U.K.-based firms are getting financial services equivalence. Equivalence permits U.K.-based firms to sell strategies and services to European Union-based clients. In its absence, Mr. Ng warned that any firms selling financial products to EU investors will be "breaking the law" unless they have secured licenses to operate in their clients' member states.
A lack of agreement between the EU and the U.K. on equivalence means that the status of U.K.-based distribution executives, financial controllers and potentially portfolio managers still needs to be worked out, sources said.
Deirdre Flood, head of distribution at Wells Fargo Asset Management Ltd. in London, said: "Some of the Nordic countries allowed temporary permissions (to the U.K.). We did initially consider short assignments (for distribution employees) but because of COVID, I made the decision it was not the right to ask anybody to move with the backdrop that we have. We have aborted this plan." Wells Fargo AM managed $9.3 billion on behalf of EU clients as of Sept. 30.
Mr. Ng added that a prolonging lack of agreement on equivalence could hurt market liquidity in Europe in equity and derivative markets. For example, managers utilizing derivatives in their strategies will rely on their brokers to shift trading from EU exchanges to, for example, U.S. exchanges in order to ensure they have access to deep enough liquidity to trade. "EU firms will be forced to trade on EU venues, which will create fragmented pools of liquidity," he said. "It will be more expensive for everyone."
In 2021, managers will also be watching the issue of portfolio delegation under the Alternative Investment Fund Managers Directive, which is yet to be revised post-Brexit and could require portfolio managers that run assets on behalf of European clients to be based in European cities rather than in London. "We are hoping that sense will prevail and that there won't have to be a mass migration by the portfolio managers," Ms. Flood said. "We are not expecting this to be the case" she added.