It is way too early to foresee what a Post-Brexit financial world would look like, especially because positions of the two negotiating Parties – the UK and the EU – are still far to be clear.
Some British commentators argue that given the current evident EU system’s crisis, strengthened by a populist wind blowing over influential Members of the Union (e.g. France, and Italy), the UK might hold a winning hand and should play “all in” at the negotiations’ table.
On the flipside, the European Union could decline any concessions to Britain, properly to set an example to any other EU Member, even considering to quit the Union.
In any sense, Brexit represents an opportunity rather than a threat for jurisdictions like Luxembourg and Ireland – also benefitting from those global asset managers which prefer killing the current uncertainty and take pre-emptive relocation decisions.
As you can see there is a lot at stake, with upsides and downsides, depending on the perspectives of each Party directly or indirectly involved.
Only the future will tell whether the Brexit’s soundtrack would be Let it Be… or ….Let it Bleed.
Brexit – the current ‘State-Of-The-Art’
Besides June 23 2016 – the day of the historic Brexit Referendum – March 29 2017 is supposed to become another date to remember.
By invoking the formal negotiation process under Article 50 of the Treaty of the European Union, UK Prime Minister Theresa May officially starts a process that would result into the UK leaving the EU Bloc after almost 50 years of Membership.
The UK PM anticipates to obtain a ‘bold’ EU free trade deal for the United Kingdom, and this latter is expected to leave the customs union in its present form.
Mrs May’s power to trigger Article 50 was enacted by the Queen’s sign off on the Brexit bill earlier last month.
The Members of the Parliament voted to pass the Brexit bill and turned down amendments suggested by those pro-EU peers in the House of Lords.
The Parliament will be again summoned to vote on the final EU deal after two years of expected-to-be-tough Brexit negotiations.
When Brexit will be eventually official, the so-called Great Repeal Bill will come into force, and – quoting Brexit Secretary David Davis – will “end the supremacy” of EU law over Britain’s own legislation, “delivering” on the outcome of the historic referendum.
In the meantime, the Scotland’s First Minister Nicola Sturgeon is calling for a second Scottish independence referendum, supported by that majority of Scots that voted Remain on 23 June 2016.
Seemingly, additional headaches might derive from Northern Ireland, not really keen to leave the EU Bloc, “sympathizing” with the neighbouring Republic of Ireland.
There is more than a lot at stake and most of the practical effects of this unprecedented event are quite difficult to forecast; whereas some of them are already pretty clear (e.g. the enormous administrative burden generated from the outcome of certain EU treaties’ renegotiations – possibly to become bilateral agreements?).
Alea iacta est.
“Hard Brexit”: risks for UK Asset Managers and Alternative Routes to access the Single Market
EU Passporting Regime – AIFMD and MIFID (1 and 2)
As from an Asset Management perspective, UK players might be severally impacted in case of a “Hard Brexit” resulting into the loss of the so-called EU Passporting, that enables asset managers and other financial services companies to easily manage and sell services across the European Union.
In fact, according to recent data, European investors represent at least 13 % of British investment fund players’ assets on average, out of almost GBP 6 trillion UK’s investment industry. Hence, keeping access to the EU single market sounds more than relevant.
Great Britain might mitigate the risk of losing the access to the EU Passporting regime, to the extent they would manage to remain at least part of the European Economic Area.
However, given the latest stance of the UK Government on the matter, it seems PM Theresa May would be more incline to fight for limiting the free movement of people than for preserving the EU Passporting.
Anyhow, it is fair to say that historically some big global asset managers’ strategies have already set up a segregation between their UK and European activities, by relying on appropriate EU based management companies for EU domiciled funds – e.g. Aberdeen Asset Management, with their Luxembourg-based ManCo. For these players, Brexit effect would be considerably mitigated.
Besides the EU Passporting provided by the AIFM Directive, another hot topic to take into consideration is the MIFID Passporting.
At present and according to MIFID (with MIFID 2 entering into force by 2018), British asset managers are allowed to register UCITS funds in – say – Luxembourg or Dublin and distribute them across the European Union and globally, without a substantial presence in the EU – whilst keeping certain “delegated” functions of fund management and sales in the UK. To the extent the access to the single market would be denied, all this would be jeopardised.
As a matter of fact, even in a Post-Brexit scenario but under conditions, MIFID 2 might provide UK asset managers with an alternative point of access to the single market, to the extent the UK would adopt an equivalent regulatory regime to the EU.
At this stage, so to hedge any foreseeable risk, a good number of asset managers are already considering preferable alternative EU jurisdictions where they could establish or increase their presence on the purpose of maintaining the EU Passporting rights.
Although a number of possible European financial centres are under scrutiny (e.g. Paris, Brussels, Frankfurt, Milan), Luxembourg and Dublin might have a winning hand – and their competition to attract the best players in the market is becoming increasingly fierce.
Luxembourg VS Ireland – who is holding the winning hand?
Both Luxembourg and Ireland are excellent options for global asset managers.
They both enjoy a solid reputation as investment fund domiciles and provide business friendly tax systems.
By accounting over EUR 3 trillion Assets Under Management, Luxembourg is Europe’s largest investment fund centre and the second largest globally after the United States.
Although historically their reputation stemmed from harmonised funds, since the EU AIFM Directive’s implementation (AIFM Law of 12 July 2013), Luxembourg has also managed to specialise in the alternative investment funds space, with a number of registered AIFMs that is currently even higher than the traditional ManCos. This is corroborated by the opportunity to establish the so-called Super ManCos, allowed to manage UCITS and AIFs alike.
On the other hand, with approx. EUR 2 trillion AUM, Ireland is unrivalled when it comes to hedge funds, being the largest European HF domicile by far. More than 40% of World’s hedge funds are serviced in Ireland, with over EUR 452 billion in assets – with approximately 2,340 HFs.
In light of such an outstanding track record, they must both use their best efforts to win this game.
An interesting chapter of said “rivalry” is the recent allegations from Ireland’s Financial Services Minister Eoghan Murphy against some EU countries, that would be promising an easier access to the EU single market (e.g. by allowing reduced capital requirements) to certain Players in case these latter would choose them for their relocation into the EU.
The Irish Minister did not mention Luxembourg openly – but the reference to the Grand Duchy seems to be clear, considering this statement was released right after AIG’s decision to opt for Luxembourg rather than Dublin for the establishment of their Hub outside the UK.
Besides AIG, we can already acknowledge that more than a few Big Players (either British or US seeking a solid access to the EU) have already chosen Luxembourg.
Blackstone (hiring six professionals for financial, accounting, risk and compliance oversight), Carlyle and Astorg are increasing their presence in the Grand Duchy; whereas Columbia Threadneedle is relocating portfolio managers into a new Luxembourg based ManCo.
Moreover, M&G has confirmed (i) to plan to set up a Super ManCo in Luxembourg; (ii) to launch a range of SICAVs by March 2019 replicating the same investment strategies of their UK Open-Ended Funds; and (iii) to set up another Luxembourg legal entity on the purpose of investment fund products’ distribution across the EU.
On the other side, Ireland might be able to attract those players preferring an Anglo-Saxon approach to the business, or an obvious language proximity. Also, Ireland might leverage from the historical similarity of the Irish and UK legal and business frameworks that would facilitate the potential invocation of the “Equivalence” principle provided under certain EU Directives (e.g. MIFID 2).
At present, Legg Mason and the asset management arm of Bank of America seem to have already opted for Dublin as alternative Post-Brexit location.
Conclusion
As previously mentioned, we would like to maintain an optimistic outlook over the Post-Brexit scenarios and highlight any new business opportunities to come across for the different Parties involved – including Luxembourg and Ireland.
For instance, it is already a fact that a specific market niche – the Third Party ManCo model – would gain traction from Brexit.
Essentially, a UK asset manager might appoint a Third Party AIFM in Luxembourg or in Ireland that would manage their EU-based AIF/s enabling the access to the EU Passporting regime. A number of functions could be still delegated back to the UK (e.g. portfolio management), preventing a massive relocation into the EU.
In this respect, Luxembourg is particularly strong, with more than a few excellent players specialised in third party management company services that are witnessing a steep business growth.
We will be following up on the Brexit developments. Interesting times ahead.
Written by Marco Vernia
