Brexit Briefing: Developing a Mind Map
Although formal negotiations over the U.K.’s exit have not yet begun, investors may be starting to think about what might happen.
Despite U.K. Prime Minister Theresa May’s much-repeated “Brexit means Brexit” comment, little is known yet about what Brexit actually will mean. But financial regulation expert Jérôme de Lavenère Lussan, CEO at Laven Partners, says that as details emerge over the coming months, investors and managers should develop their own mind maps as a first step in planning for Brexit. He outlined three possible options for U.K.-based asset managers marketing funds in the European Union, by way of example:
• Option 1: U.K.-based asset managers can stay as they are. Negotiations will allow U.K. managers to continue to distribute funds in other EU states, which is a regulated activity for asset managers.
• Option 2: U.K.-based managers will not be allowed to distribute their funds in the EU, because they lose so-called passporting rights to the single market. Therefore, they will have to place part of their core business somewhere else in the EU to allow them to market across the EU, but they will also have to keep part of the business in the U.K. as well, for serving that market.
• Option 3: A U.K.-based manager could decide to move all its business to an EU center, on the basis that it will then be able to distribute funds back into the U.K. A manager might find it easier to be based in Luxembourg and distribute into the U.K., rather than try to market funds from the U.K. into Europe.
“The next decision is over when a manager wants to exercise any of these options,” Lussan tells Investor Intelligence Network. “If you are the last arrive at the table, then maybe you will find that Luxembourg or Paris, or another EU financial center, is full. But if you decide to move to, say, Paris too early, and everyone else goes to Frankfurt, then you will arguably be in the wrong place in terms of employment and business capacity. So managers have to start building a mind map about what’s available and when they should move. I think it would be a waste of time and money to start making detailed plans right now, but you can definitely start making the mind map.
“As time passes, we will learn more about what will happen. For example, we learned in early January, from an outgoing U.K. diplomat’s point of view [U.K. ambassador to the EU Sir Ivan Rogers], that the negotiations will most likely take longer than two years. We also heard this from a senior civil servant who had worked for former prime minister of the U.K. Tony Blair. So we already know a bit more now, compared to January 1, about the two-year window for Article 50 talks. And we heard in December from Michel Barnier, the European Commission’s Brexit negotiator, that when Article 50 is invoked, the two-year window will not necessarily lead to a passport for financial services in the U.K.
“On the other hand, U.S. President-elect Donald Trump and former UKIP leader Nigel Farage are more positive on a U.K.-USA trade deal. That has nothing to do with U.K. financial services, at least not directly, as U.K.-based managers don’t rely on the passport to market in the U.S. but have to be registered with the SEC, so that doesn’t change much. But it is news nonetheless that could have an impact, so we need to bide our time.”
The Investor Perspective
European investors also have to take a view on how Brexit could affect their use of U.K.-based asset managers, according to Lussan: “I suspect that European investors are going to have a potential problem now investing in a U.K. fund. They will have to decide whether they want to be in a fund that is not regulated under EU rules. And if you listen to some of the U.K. politicians who want to deregulate in a post-Brexit Britain, that might make the U.K. less attractive for European pension funds. If the U.K. asset management industry does lose pension fund money from Germany and France, it would be a big problem.
“On the other hand, investors from outside Europe might not care whether they are in a fund regulated under U.K. or EU rules, or might even see deregulation in the U.K. as a benefit. Or they may think that the U.K. will get a deal in two years’ time, so its fund managers abide by the same rules and regulations as before. But that would imply a Norway-type of deal, which allows the free movement of people, which is apparently a red line in negotiations for Theresa May. If that is the case, then nothing changes for you as an investor, but you might not want to depend on that.”
Will Asset Managers Leave London?
Asked if he is seeing any business leaving London for the European Union, Lussan demurs, saying that the focus of his work is compliance, not setting up businesses. “But what I have seen is that clients who were supposed to expand on their client framework here in the U.K. are not, and, for example, are expanding their French office,” he says. “I’ve seen that on three or four occasions over the past five months; it is business that I know I’m not going to get.
“And I’ve seen people consider whether to start new businesses in Luxembourg or Ireland, as opposed to the U.K. It can be a struggle, though: The reality is that their lives are here in the U.K., and employment is easier here. One option is to use platforms based in Luxembourg or Dublin, and certainly the popularity of platforms has grown. People have established themselves abroad on a platform while maintaining an office here.”
Deal or No Deal on Passporting?
In Lussan’s view, many investors in the U.K. are being unduly optimistic about the prospects of asset managers keeping the same rights to operate in the EU after Brexit. He says that “people believe that something will be agreed with regard to the passport issue. I do not, maybe because I’m originally from France. There is no benefit for Germany and France to agree a deal. I don’t see how there could be. I’m cynical, but it’s still too early to call; I think we need to wait another eight months.”
Assuming no passporting deal, where will asset managers go if they leave the U.K.? “We did a survey on this, post-Brexit, in July, and it was really interesting because one of the places that came up, which we didn’t expect, was Amsterdam. I think that the Netherlands has a big card to play here. Luxembourg was fourth, which was lower than we expected, but it can be hard to live there. Dublin and Paris are more attractive places to live if you want a cosmopolitan life. I don’t see anyone moving to Italy, because there is a lack of stability. And Germany is also a strong contender. I think that the whole thing is up for grabs, and anyone who is well organized can get business. The small centers, such as Malta, could also do well. It is obviously very difficult to predict the future, but investors and managers need to have a Plan B. And I think you need to work on it slowly but surely.”