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As Article 50 is triggered this week, the UK industry is no clearer on what come next

Europe’s asset management industry is bracing for significant upheaval as the UK prepares for its exit from the EU.

British prime minister Theresa May is this week expected to trigger Article 50, the formal notification of the UK’s two-year divorce process from the economic bloc.

The impact of triggering Article 50 on markets and currencies is unknown. This is one of the many uncertainties that has intensified pressure on asset managers, who are already nervous about the many questions Brexit has raised for their businesses.

Saker Nusseibeh, chief executive of Hermes Investment Management, the UK fund house, says: “We have absolutely no idea what the outcome [of Brexit] will be.”

Huge sums of money are at risk.

A report from the London School of Economics found that a quarter of the £24bn of revenues booked annually by UK asset managers is derived from EU-related business. About £3bn of this business could move outside of the UK post-Brexit, the report found.

Mr Nusseibeh says: “We are about to enter a period of huge change for the [UK] fund industry. Its main market is about to become a foreign market.

“The fund industry will have to abide by foreign market rules. How tough these regulations will be will depend on how acrimonious or friendly the [Brexit] negotiations are. Whether the future is bright or grey, no one knows.”

The big Brexit-related questions weighing on the minds of asset managers are whether they will be able to continue to access EU clients; what limitations they might face when hiring European nationals in Britain, and whether they need to relocate staff outside of the UK.

Will Brexit hurt retail fund distribution?

One of the biggest concerns for asset managers is whether they will face restrictions when selling funds to retail investors following Brexit.

Europe’s asset management industry has grown rapidly over the past three decades thanks to the development of an EU-wide framework for mutual funds, known as Ucits. Under this regime, which accounts for nearly €9tn of assets in Europe, a fund can be regulated in Luxembourg, managed in London and sold in Paris.

The fear is that it will no longer be possible to sell EU-registered funds to UK investors, and vice versa, post-Brexit. More than two-thirds of investment professionals believe UK asset managers will not be able to sell their funds freely across the EU following Britain’s departure from the EU, according to a poll conducted by PwC, the accountancy firm, last year.

Julie Patterson, an asset management expert at KPMG, the consultancy, says: “Post Brexit, Ucits [domiciled in the UK] will have a problem because they will not be Ucits.”

Mark Holman, chief executive of TwentyFour Asset Management, the UK-based fund house, says any restrictions on selling asset management services overseas would be problematic.

“Our client base is very UK centric, so it does impact us less, but still we must make plans to ensure that our infrastructure can cope with us leaving the EU,” he says.

Some asset managers believe they can overcome this problem by establishing fund ranges in a European country like Ireland or Luxembourg for their EU clients, while offering UK-domiciled funds for British investors.

London-headquartered M&G has already bolstered its presence in Luxembourg and Ireland in order to hold on to its mainland European clients.

What does Brexit mean for targeting pension fund clients?

Another thorny issue for UK asset managers in the post-Brexit world relates to institutional investors, such as pension funds and insurers.

Fund houses fear that some of £1.2tn managed in the UK for European clients could be at risk when the UK exits the EU.

At the heart of the problem is Mifid, a sprawling set of European rules that outline how investment services can be provided across the EU.

If the UK opts for a hard Brexit and withdraws from the European single market, asset managers could find their Mifid license is no longer valid, leaving them unable to access or service some European clients.

Some countries, such as Italy, have rules that require pension funds to use EU-based investment managers. This means that British fund companies that received a Mifid license from the UK regulator could struggle to win institutional business in these countries.

Mr Nusseibeh, whose company has a UK Mifid license and a large European client base, says: “London is the main hub for managing money for pension funds in Europe. When Brexit happens, you are likely to have two separate regulatory frameworks.

“To do business in Europe, we have to abide by European rules. That might add additional cost.”

How will hedge funds and other alternative asset managers access EU clients?

Hedge funds, private equity and other alternative investment managers also fear they could face restrictions when it comes to accessing investors in the EU and the UK.

Under the EU’s Alternative Investment Fund Managers Directive, the regulation for private equity, real estate and hedge funds, there were plans to allow non-EU managers to sell their funds in the economic bloc.

But these plans appear to have stalled since Brexit, raising concerns that UK alternative fund managers could be frozen out of the EU as well.

Aima, the association for global alternative asset managers, in December urged the UK government to push for British investment managers to continue to be able to sell funds across the continent with ease.

According to Aima, more than three quarters of European hedge fund assets are managed from the UK. Aima deputy CEO Jiri Krol says: “The UK will need to ensure its rules are flexible enough to allow UK-based investment firms to continue to do business with the rest of the EU.”

Will asset managers need to hire more staff in Europe?

The City of London has traditionally been the employment hub for Europe’s asset management industry, accounting for around 37,000 jobs. But there is a growing view that asset managers will need to increase the number of staff they employ outside of the UK.

European regulators usually require asset managers to have some staff on the ground in the EU when granting licences and approving funds, rather than simply establishing a “brass plate” entity. Regulatory experts have previously told the FT that if asset managers want to set up a Mifid company in the EU, it would need to be staffed by at least 20-50 specialists to prove that it has substance.

There are also question marks about whether portfolio management staff might have to relocate because of growing scrutiny on so-called delegation. This refers to asset managers registering a fund in one country, such as Luxembourg, but keeping their portfolio management staff in another country, such as the UK.

Earlier this month the European Securities and Markets Authority said it was examining issues around delegation to limit “regulatory arbitrage”, whereby asset managers use EU bases to conduct business across Europe but keep most senior staff in London. This has intensified fears that asset managers might have to move investment staff to EU countries in order to satisfy local regulators.

Christian Edelmann, global head of the institutional banking practice at Oliver Wyman, the consultancy, says: “The biggest concern for the industry is the question mark about delegation of portfolio management rights.”

The LSE report suggested that about 15,000 wealth and asset management jobs in the UK are at risk following Brexit.

Will the UK suffer a brain drain?

A recent Aima survey found that about a fifth of employees in the UK hedge fund industry come from mainland Europe. EU nationals also account for around a tenth of the workforce at mainstream UK asset management companies, including Schroders, M&G and Henderson.

The fund industry is concerned that efforts by the UK government to clamp down on immigration from the EU could restrict access to vital employees, from investment professionals to cleaning staff.

Mr Edelmann says: “There is a risk of a brain drain and a further inability to recruit talent in the future.”

Mr Holman adds: “This is a key issue. Being able to attract and retain the best talent from around the globe is integral to outperformance.

“Whilst we wait for what we hope is a sensible and pragmatic result, we are also prepared to deal with a more cumbersome process should it come to that.”

What next for the industry?

Chris Cummings, chief executive of the Investment Association, the trade body for UK fund houses, says the industry needs clarity about its future, particularly any changes to how it accesses investors.

“Our industry serves millions of savers across the EU and the world, and it is in our clients’ interests that there is a smooth transition from the status quo to the post-Brexit world,” he says. “It is crucial that asset managers have legal certainty and the appropriate timeframe to adjust to any new requirements so they can continue to serve their clients’ needs.”