When the UK voted to leave the EU on 23 June 2016, a veil of uncertainty fell over the UK’s financial services sector. What would a new relationship look like with the EU? How would its status as a leading global asset management centre be affected?
Untangling over 40 years of UK-EU affairs – agreements, treaties and delegation – was never going to be easy. What we do know is that come 30th March 2019, in the absence of a withdrawal agreement, all EU law will cease to apply to the UK.
Fears of no deal rising
After 524 days of negotiations, the UK and the EU’s other 27 heads of state and government have agreed a deal to be put in front of the UK and European parliaments for ratification ahead of Britain’s withdrawal in March 2019.
However many political commentators fear that Theresa May will not succeed in guiding the deal through parliament when British MPs vote on whether to accept or reject the withdrawal agreement on December 11.
Recent political turmoil in London over Brexit coupled with the fall of the pound prompted some of The City’s biggest institutions to accelerate their ‘no-deal’ Brexit plans.
Asset managers across Europe are preparing for the harshest possible exit for the UK from the EU. In a recent survey, nearly two-thirds said they were preparing for a “hard” Brexit scenario as fears are rising that a no-deal Brexit will cut them off from investors. The research, carried out by Liquidnet, showed that half had already put contingency plans into action.
The beginning of ‘Brexodus’?
The trickle of jobs relocating away from London may start to become a steady flow. Financial News reported that 1,800 financial services jobs have already been confirmed to leave London in what some media outlets are calling Brexodus.
According to the City of London Corporation, there are 483,000 people currently working in financial services in the City. It’s estimated between 5,000 and 13,000 jobs will have moved to the EU by the Brexit deadline. Some employees from Deutsche Bank, BNP Paribas, Crédit Agricole, Credit Suisse, Societe Generale, Standard Chartered and UBS have already been told they will have to quit the Square Mile.
Global Brexit concern
Interestingly, Brexit is not only a worry for European asset managers. US fund managers are also fearing the effects of a so-called hard Brexit. Fitch Solutions and WBR Insights, Navigating The Cycles white paper, showed that 50% of US-based respondents are concerned over the impact of Brexit.
The report, which surveyed 300 asset managers across Europe, North America and Asia Pacific, found 44% of respondents highlighted a fallout from the Brexit negotiations as a key concern, second only to inflation.
Regulation and legislation
In terms of asset management regulation, three major regulatory regimes will no longer apply to the UK post Brexit,
The UCITS Directive – a regulatory regime for retail investment funds with strict rules on the types of asset classes in which a UCITS may invest,
The AIFM Directive – regulates alternative investment funds (AIFs) including hedge funds and private equity funds,
The MiFID Directive – regulates the provision of investment services where assets are not managed using a fund structure.
These three directives also grant EU “passporting” rights to asset management firms, authorising them to operate in any EU member state with little or no restrictions. The loss of this EU passport is the single biggest challenge which UK asset managers may have to face post-Brexit.
The clock is ticking
Time has become the crucial element in this Brexit staring match. A survey of 52 European asset managers by PwC in early October found that nearly half of European asset managers are struggling to be ready on time for the March 2019 deadline.
PwC’s report suggests that many firms are running out of time. Close to 44% are still making preliminary assessments of their Brexit needs or have not started planning at all, while nearly a quarter do not expect to complete their Brexit plans until 2021.
In June representatives of the Central Bank of Ireland urged firms look to be authorised in Ireland to apply straight away, with the process taking around 6-9 months. Last month, the central bank said it was currently processing over 100 Brexit-related applications to authorise firms across sectors. According to the IDA, asset management and investment firms make up about half of this number.
Ireland as a solution
Ireland is certainly high on the list of jurisdictions for many UK financial groups’ contingency plans.
Some have already made the decision to establish a regulated entity here. With long-standing ties to the UK, a common language and time zone, and a comparable legal system and culture, Ireland is well positioned to gain from any Brexodus.
According to the PwC report, 39% of the surveyed asset managers are looking to relocate functions to Ireland. Several asset managers have already opted to move some operations to Dublin, including Legg Mason, First State and Baring Asset Management. British Investment manager Ashmore will also open a Dublin office citing the “substantial uncertainty” that remains over Brexit.
One of Ireland’s significant advantages is that many of the investment funds managed out of the UK are already domiciled in Ireland. Currently close to €2.4 trillion worth of fund assets are administered here. Providing MiFID services with an existing UCITS management company or AIFM company authorisation will also appeal to many. Avoiding having to set up a standalone MiFID entity gives Ireland another advantage and seems like the logical choice for many firms who already have existing UCITS management companies and/or AIFM companies acting as managers to funds domiciled in here.
Rodney shares insights from his 20 years’ experience working in the legal and accounting industries with both Irish and international companies. As Managing Director at Cafico International, Rodney regularly works with international companies in the technology, pharma, aviation and insurance industries that are seeking to establish operations in Ireland, assisting them with the management of their projects, and compliance with their fiscal and legal responsibilities.
To learn how Cafico International can help your business expand to Ireland, get in touch with Rodney today.