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Brexit is the biggest challenge facing UK asset managers since the financial crisis – potentially even for a generation. The UK government has confirmed that the country will leave the Single Market, a process that will cement drastic change at financial institutions including fund managers in both the UK and EU-27.
The NCI recognises that financial institutions including fund managers will face disruption over the coming years, including uncertainty over where euro denominated swaps will be cleared, or concern that inflexible UK immigration quotas could deprive organisations of EU talent leading to severe skills shortages. This paper does not seek to remedy those problems, but proposes a positive solution to some specific challenges that asset managers may encounter over the next two to five years.
Pulling out of the Single Market means UCITS and AIFMs located in the UK will lose their EU regulatory designation, and passporting rights. UK managers will fall back on national private placement regime (NPPR) rules if they choose to raise assets in the EU post-Brexit. If NPPR is taken away simultaneously to Brexit, UK asset managers will lose any access to the EU unless they have a structure in an EU country.
Industry participants have warned of other challenges. A loss of single market access could require UK managers to rewrite and even renegotiate terms and conditions for existing investors. This could risk withdrawals, especially if EU investors have a portfolio selection mandate that prescribes them to onshore products only. Service provider relationships – certainly with depositaries – would also need to be reconsidered.
Any regulatory arbitrage would be unwanted, and it is a concern among NCI members. The NCI polled its members in the months after Brexit to gauge their opinions on the current market predicament. Respondents comprised a diverse range of asset managers with a global investor base. Regulatory arbitrage between the UK and EU was cited by 54.5% of NCI members as their biggest worry; 27% identified market volatility as a paramount concern, while 18% acknowledged investor outflows/fundraising challenges was likely to be a challenge.
The NCI believes that if the UK government set up a dual funds regime, it would help asset managers deal with many of these worst case scenarios. A dual funds regime would allow UK managers with EU interests to continue to comply with EU laws and directives and retain favourable access to their EU investors, while simultaneously letting others market to the rest of the world ex EU, and avoid the worst excesses of EU regulation. Such a regime may also enable fund managers to avoid re-structuring their businesses to onshore EU locations such as Ireland and Luxembourg providing equivalence for the UK is granted.
However, a dual funds regime is not something that can be established with ease, and we recognise huge challenges lie ahead. That being said, it is an approach which could help improve competitiveness in the UK funds’ market, and ensure both the UK and EU gets a good deal out of Brexit negotiations.