02 February 2021

FT: Boutique London fund managers hit early Brexit turbulence

Further disruption for smaller investment managers as Société Générale closes services for UK funds. London’s boutique investment managers are struggling to negotiate new post-Brexit rules and trading arrangements in order to continue serving their European clients.

 Fund managers with smaller budgets than big name rivals have been hit disproportionately hard by the omission of financial services from the Brexit trade talks because they have been less able to prepare contingency plans. “We are hamstrung by Brexit,” said a sales executive at a London-based fund management boutique. “We can’t sell our products into Europe from our UK HQ. We can’t call investors and there is a big grey area around what we’re legally allowed to do.”

Under wide-reaching EU market rules known as Mifid II, companies based outside the EU are barred from directly soliciting clients based in the bloc. Europe’s markets regulator has warned fund managers and banks not to bypass post-Brexit rules on cross-border dealing. The European Securities and Markets Authority said in January that it had already found “some questionable practices”.

Most large investment groups prepared for a potential no-deal Brexit by setting up subsidiaries in EU financial hubs such as Luxembourg and Dublin, which enabled them to continue to serve their European clients. But smaller managers without the resources to set up such arrangements have been left searching for ways to work within the rules.

One popular method, dubbed the tied-agency model, involves the use of “chaperones” at EU-based businesses connected to the fund manager, such as an administrator, who facilitate the interaction with clients. But this adds layers of cost and bureaucracy. Another approach, known as “dual-hatting”, involves drawing up two contracts for sales representatives: one for when they report to the UK business, and another for when they work in the EU and report to a European subsidiary.

Other companies have made use of secondments to avoid the restrictions on cross-border marketing. “European rules don’t define what marketing is, but we can expect increased scrutiny of these arrangements,” said a person familiar with the European regulator’s thinking. He added that lots of boutiques were using such strategies on a temporary basis in expectation that the UK and EU would agree an “equivalence” regime in the coming months that would ease cross-border trade. “The European Commission keeps saying they aren’t going to look at equivalence until they know what the UK plans to do on its own regime — who’s to say that won’t be the same in six months? There is still a lot to play here.”...

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