Almost 60% of global investment groups are preparing for a hard Brexit that will see the UK crash out of the EU, according to a new study.
The study, conducted by trading network Liquidnet, interviewed 29 asset managers and hedge funds which collectively manage €12.3trn of assets.
Brexit negations resumed last week between Brussels and London at the start of an intense new phase of negotiations.
Latvia’s foreign minister Edgars Rinkevics said last week that there was a 50% chance the two sides would not be able to conclude a deal by 29 March 2019.
Eighty-three per cent of firms surveyed have a “theoretical plan” in place to respond to Brexit, but only 49% have put their plan into action so far. Another 31% of investment groups have plans “under review”, with 17% still unsure what do to.
Many global asset managers with London operations have begun rejigging their European operations as to ensure continued access to the EU as Brexit looms.
Over the last month, Edinburgh-based manager Baillie Gifford announced plans to establish a Dublin offshoot to avoid being cut off from European clients.
Bank of America, meanwhile, is reportedly preparing to move research analysts from London to its EU hub in Paris and Credit Suisse is reportedly looking to shift about 50 jobs from London to Madrid.
Fifty nine percent of firms are working towards a hard Brexit “rather than wait for political solutions which have no guarantee of emerging,” said Rebecca Healey, head of EMEA market structure and strategy at Liquidnet.
Frankfurt jobs boost
Among European cities, Frankfurt is expected to emerge as the biggest overall European beneficiary of Brexit, according to Healey. However, she said Dublin and Luxembourg are “emerging as winners for asset management services, and Amsterdam as the main location for trading venues”
UK-based asset managers enjoy ‘passporting’ rights as part of the EU single market allowing them to sell services across the EU without regulatory barriers. But in the event of the UK leaving the EU in March 2019 without a deal or transition arrangement in place they would need to establish subsidiaries within the EU and apply for a local licence to continue selling to clients within the bloc.
Under this scenario, the UK would be classified as a ‘third country’ – like Canada, Norway and India – with limited areas to EU markets on a unilateral basis where there is regulatory alignment.
In 2016, the UK represented 41% of asset management in EEA; 5,000 UK firms used 336,000 passports to access the EEA, and 8,000 EEA firms used 23,500 passports to access services in the UK., according to the European Parliament.
Legal functions threat
According to Liquidnet’s study, 54% of UK respondents and half of US firms said they were “pressing ahead with Brexit implementation plans” whereas just 40% of EEA firms have plans in place.
Seventy percent of survey respondents said they expected the believe the greatest impact of Brexit will be on legal functions, with 52% expecting this to impact their clients “significantly”.
Eighty seven percent are planning to keep trading desks where they are. However, this may be temporary with only half anticipating that change may be required depending on the outcome of any changes to ‘delegation’ rules.
‘Delegation’ questions
More than 90% of EU assets under management make use of ‘delegation’ rules which allow a fund registered in one country to outsource its asset management to another country. Most European funds are registered in Dublin or Luxembourg, with most global asset management work ‘delegated’ to London.
A recent UK Treasury paper reaffirmed the ability of non-UK firms to continue accessing UK markets via the overseas persons regime, and in the event of a hard Brexit, maintain access through the Temporary Permissions regime – however, this not a view shared by all in the EEA.
“Many firms continue to base their Brexit strategy on the ability to continue delegation of services. There are as yet, no guarantees,” Healey said.
“[Even] if an exit agreement is reached and enhanced equivalence is granted, ensuring new legal co-operation agreements between the British Financial Conduct Authority (FCA) and European Economic Area (EEA) national competent authorities (NCAs) are in place in time will be challenging – particularly bearing in mind the likely fragility of the equivalence regime, the time it will take to implement as well as the need for individual member state agreement,” she said.
Healey added that in the event of a hard Brexit, there will be significant substance issues required.
“Recent European Securities and Markets Authority (Esma) opinion focuses on the need to demonstrate justifiable reasons for delegating EEA based activity to a non-EEA entity,” she said.
“Navigating the differences between fund vehicles, delegated managers, segregated accounts and differing regulatory substance requirements will be a minefield of complexity.”
