Uncertainty over future passporting rights puts mandates for European clients at risk
Luxembourg, Ireland and France have begun circling a £1.2tn pot of assets managed in the UK for European investors, exploiting the growing uncertainty about Brexit and its potential impact on the investment industry.
Rival fund centres to the UK believe Britain’s status as the European asset management hub for pension and insurance cash is under pressure following the country’s vote to leave the EU, offering them the chance to lure business away.
The UK’s asset management industry is a world leader in so-called segregated accounts or mandates, individual pots of cash managed for big investors such as pension funds and insurers. These mandates account for £3.3tn of the £5.5tn managed by the UK investment industry, according to the Investment Association, the trade body for asset managers.
The fear is that some of the estimated £1.2tn overseen by UK investment managers for European clients in segregated accounts might be at risk after Brexit. This is because of local rules requiring some European pension funds to ensure their assets are run by EU asset managers or simply because of a preference for such an arrangement.
Denise Voss, who chairs Alfi, the Luxembourg fund association, says the grand duchy sees Brexit as a “big opportunity” to grow its share of Europe’s segregated accounts business. It is Europe’s largest fund domicile, with a focus on regulated investment funds known as Ucits.
“Luxembourg could become a hub or at least an important centre for EU segregated mandate business currently managed out of the UK,” says Ms Voss.
Ireland, Europe’s second-largest fund domicile, has equally set its sights on the UK’s pool of assets. Kieran Fox, director of business development at Irish Funds, the trade body, says: “We are doing everything we can to speak to everyone possible in order to ensure Ireland is as ready as it can be to provide solutions to asset managers looking at their options post-Brexit.”
Pierre Bollon, chief executive of the Association Française de la Gestion Financière, the French trade body for asset managers, adds: “The mandate market is very important in France. It is just as important as the fund market.
“[Brexit could mean] investors prefer to have a mandate managed inside the European Union, and Paris is the ideal place.”
Just last week, Morningstar, the fund rating giant, announced plans to move its investment management operations for European clients from London to Paris amid concerns about the impact of the UK vote to leave the EU.
Asset managers across the EU have long relied on the passporting regime that enables asset managers and other financial services companies to sell services across the single market with ease. Once the UK leaves the EU, however, it is not clear whether British asset managers will find it as easy to access and service European investors.
At the heart of asset managers’ problem is the so-called Mifid license. Mifid, or the Markets in Financial Instruments Directive, is a sprawling set of European rules that set out how investment services can be provided across the EU.
If the UK opts for a hard Brexit, asset managers could find their Mifid licence is no longer valid, leaving them unable to access or service some European clients. Companies such as Legal & General Investment Management, Capital Group and M&G only have Mifid licences in the UK.
In countries such as Italy, local rules require pension funds to use EU-based investment managers, meaning asset managers that are registered under Mifid in the UK face being locked out of these markets in future.
Some institutional investors also have internal guidelines requiring them to use an EU-based investment manager, says Ms Voss. Others like knowing they are using a fund house that is regulated within the EU, believing this offers them more protection. “Even if the [trustees at] pension funds are not required by regulation to contract with an EU-based manager, they may take more comfort in doing so,” she adds.
Fund houses with large operations in the UK are now grappling with the question of how they will continue to service European clients when the country leaves the EU. Sean Tuffy, head of regulatory intelligence at Brown Brothers Harriman, the US banks, says: “The segregated account issue may be a potentially big headache for UK asset managers.”
Owen Lysak, senior associate at Clifford Chance, the law firm, says the hope among many British asset managers is that the UK will be deemed as “equivalent”, meaning it is granted special status as a so-called third-country because its rules are similar to the EU’s. This would allow investment houses to continue running money for EU pension funds and other big investors, he says.
“I would expect the UK to ultimately achieve third-country status. I can’t imagine a situation where the UK was not able to manage money [for some EU pension funds],” adds Uner Nabi, executive director within the wealth and asset management team and an expert in Mifid at EY, the consultancy.
If the third-country status does not come through, however, or there is a gap until it comes through, then asset managers might have to think about whether they need an EU Mifid subsidiary.
Some asset managers are unwilling to take the risk of potential restrictions when dealing with EU mandates and are already looking to set up a Mifid-regulated business in another European country. Ms Voss says: “The uncertainty [following Brexit] is so great. From our discussions with asset managers, they are not waiting.”
It is understood that several international asset managers that have a Mifid licence in the UK are in discussions with regulators in various EU member states about establishing operations outside Britain in order to continue to access European clients.
Mr Tuffy says: “There is a high likelihood that UK [companies] will look to establish Mifid [companies] in the EU, and Luxembourg and Ireland are well placed to become home to these new Mifid [companies].”
Jorge Morley-Smith, a director at the Investment Association, adds: “We are speaking to [companies] who say they have plans to set up an EU Mifid [company].
“If you are selling funds in Italy and Spain, there may be local rules in Spain around how you sell funds, which means it is easier if you have an EU Mifid [company].”
But getting a Mifid licence comes with challenges, not least that it can take months or even years. In terms of where to apply for a Mifid licence, “big on the list is ease of dealing with the regulator. In some countries it can take many months and be quite admin heavy,” says Mr Lysak.
Fund houses are also likely to need to relocate or recruit staff for these entities, which is good news for countries that want to attract Mifid businesses. Mr Tuffy says: “The big question is how much substance these [companies] will need to have. No European regulator is going to allow so-called brass-plaque entities. These new Mifid [companies] will have to be staffed.”
The expectation is that while these companies might employ 20 or so people, portfolio management would be delegated back to a business in the UK. Luxembourg and Dublin hope they can also attract more portfolio management staff.
Much of this will depend on politics and negotiation. With so little information available about what Brexit will mean for the investment management industry, the success of Ireland, Luxembourg and France’s attempts to win business from the UK remains uncertain.
Mr Nabi says: “Whether rivals manage to capitalise on that opportunity ultimately depends on what proportion of the asset managers feel sufficiently nervous to make a move.”
