Financial Services Equivalence - Let the End Games Begin
And, so, the sabre rattling has started in the financial services bucket of Brexit. Michel Barnier recently commented: “I’d like to take this opportunity to make it clear to certain people in the United Kingdom authority that they should not kid themselves about this. There will not be general open-ended ongoing equivalence in financial services, nor other management or financial agreements with the United Kingdom”. This was in reaction to a long photo shot of a briefing paper snapped as it was being wheeled into Number 10. This paper suggested that the UK would look for a “permanent equivalence” regime for financial services. Now, agreed, this was on (now former) Chancellor of the Exchequer Sajid Javid’s wish list but still, lines are hardening even before the format for the FTA meetings has been agreed. The new, soon to be occupant of Number 11 was very quick out of the blocks suggesting that the UK doesn’t need a FTA with the EU to actually leave, which is true, but where does this actually leave us?
Let’s take the concept of delegation first. This allows funds to be set up and domiciled in one EU state (usually Ireland or Luxembourg) while the investment management of those funds is delegated to an IM in another country (for our purposes, the UK). For Luxembourg alone, whose AUM hit over EUR4 Trn recently, 17% of that number was represented by funds managed in the UK under this model. The US was slightly higher at just over 20%.
The European Commission hinted in 2018 that it would like to strengthen the powers of the European Securities Markets Association. This was taken to mean that, amongst other things, the regulatory stance on the delegation concept could be in jeopardy (a reaction to Brexit presumably), a position that has rung very loud warning bells in Luxembourg and Ireland. We view this as a very unlikely scenario regardless of the outcome of the FTA negotiations but it is worth keeping an eye on, the repercussions do not bear thinking about, as ever with the EU, it will be a political not an economic decision.
David Frost, top UK Brexit negotiator, recently stated “So to think that we might accept EU supervision on so-called level playing field issues simply fails to see the point of what we are doing. That isn’t a simple negotiating position which might move under pressure – it is the point of the whole project”. It is very hard to see any compatibility in the positions of both negotiating parties thus far.
The hope, of course, is that all parties see sense and allow the obvious equivalence of the regulation of financial markets in the EU and the UK to stand as is and take any future divergence on a case by case basis.
Blackheath Capital already acts as the delegated IM to several fund structures domiciled both on and offshore. For any further information on this model please get in touch.
020 3880 6640 – info@blackheathcapital.com