Delegating Brexit Risk
Brexit is a word that evokes strong reactions across all walks of life in the UK and despite us now being more than three years on from the moment Britain voted to leave the EU, there is still just as much uncertainty about what will happen and when, which is hugely unhelpful for asset managers.
The country’s new Prime Minister Boris Johnson has made clear his intention to take the UK out of the EU on October 31 with or without a deal, but many MP’s who do not support Brexit or oppose a no deal exit will push hard for any constitutional means by which Parliament can block either. So, we still don’t know anything for sure.
The trouble with all the uncertainty is that companies – especially asset managers and advisers – are in limbo when it comes to making plans for the future. Much has been made of UK-based firms spending hundreds of thousands of pounds as a minimum to set up alternative offices abroad so they can continue to access the EU markets, no matter what. But less has been made of the need for EU fund managers to retain access to UK clients, because if there is a no deal Brexit, the chances are it will create issues both ways.
Until we know for sure whether the passporting access that the UK and EU currently enjoy will be retained, it is impossible to say whether any money spent on solutions now is wasted. So, many companies are being forced to either spend on the off chance it is needed or wait and see what happens.
UK asset managers had assets under management (AuM) of €9.4 trillion in 2015, around 41% of the €23.1 trillion total in the EU, according to data analysis from Bankinghub.eu. However, when it comes to money generated by the UK, at €5.7 trillion it is actually the second-largest world market. So, losing access to UK retail business would be a considerable loss for European fund managers.
There is no question that a hard Brexit would leave many EU asset managers without an automatic mandate to continue managing assets on behalf of these UK clients, much less to offer any kind of advisory services without setting up an alternative business with real substance here and vice versa for UK managers.
The current MiFID regulations allow any authorised manager in the UK to offer the equivalent services to any other EEA country based on the authorisation of that manager by the UK’s home regulator, and vice versa. Similar product passporting rights exist under UCITS and AIFMD, both EU directives, which allow marketing of some investment products across the EU and back into the UK with no need for additional verification, providing the asset manager is authorised to undertake these activities by their home regulator. Again, these automatic rights would disappear under a no deal exit from the EU. Boris Johnson said over the weekend that it is ‘touch and go’ as to whether a deal can be struck before October 31.
So, what can asset managers who want to keep their clients across the UK and Europe do to prepare no matter what happens in October? One potential option for EU managers is to delegate your investment management services to a third-party that already has the relevant authorisations within the UK, so you don’t need to set up additional offices with the commensurate costs involved, including finding relevant and highly-sought-after staff.
The delegation of management services will have a large number of benefits, including unbroken access to the UK markets, the ability to put your clients at ease now while all Brexit shenanigans play out in the UK and European parliaments, and the avoidance of paying through the nose for changes that you may not need after all. It means companies can be nimble, and change plans quickly depending what is ultimately decided by the politicians.
Quite aside from the Brexit issues, a third-party asset manager can save you a number of other costs too, in terms of staffing, compliance and risk management – areas that are a constant battle for investment managers generally.
If you have not considered using a third-party manager before, then now might be the perfect time.
If you would like more information or advice on how Blackheath Capital can help with regards to investment management services, then please contact Stephane Carty or Simon Monson on +44 (0) 20 3880 6640 or by email at info@blackheathcapital.com.
