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13 December 2015

Financial Times: Brexit risk a chance for industry to engage in eurozone recovery

The UK’s fund industry should continue to prosper, in or out, say Huw van Steenis and Bruce Hamilton.

Could rising fears of a British exit from the European Union be a bigger risk to the valuations of UK asset managers than to UK banks? This could be one of the big surprises for 2016.

Britain’s fund management industry has been a huge beneficiary of the single market. Take Ucits funds, Europe’s mutual fund umbrella: created 30 years ago, they are now the gold standard for retail investors, with more than €8tn of assets under management.

The UK’s fund management industry accounts for more than a third of assets managed in Europe. A key aspect of this growth has been UK companies’ ability to “passport” their funds into Europe as EU members. The benefits to the UK flow well beyond the City, with many jobs based in Edinburgh, Leeds and Glasgow. [...]

With the odds of Brexit in the polls close to one in three, according to Morgan Stanley research, fund managers need to explore the alternative scenarios. Brexit could raise questions about the ability of UK-based groups to sell retail funds elsewhere in Europe, if protectionist barriers are put up over time. [...]

The European Central Bank’s dangerous experiment with negative deposit rates poses significant risks to the eurozone’s banks. As the ECB policy is a disincentive for banks to hold deposits, those institutions, controlling three-quarters of all fund distribution in Europe, will be under pressure to find other sources of fee income. Asset and wealth management are likely to be top of the list.

Brexit could affect distribution, competitiveness, legal structures and currency risk for asset managers.

Distribution costs may rise if the UK were not a European Economic Area member following Brexit, and the UK would need to renegotiate with each country to retain access to EU markets in financial services. [...]

Critical here would be the level necessary to satisfy localcountry authorities in the EU that the management company would have sufficient “substance” not to be a mere “letterbox” entity. If the EU drew the line much more tightly than it does for Swiss companies today, it would have a significant bearing on the level of resourcing required in the new EU-based authorised management company. But even if the UK could gain Swiss terms, there would probably be additional transaction costs, affecting competitiveness. [...]

Supporting European commissioner Lord Hill’s Capital Markets Union initiative to channel more market-based savings to eurozone companies is a key initiative — and UK fund managers have much to offer. If the risks of Brexit encourage asset managers to engage more in helping build a more vibrant and prosperous EU, there may be a silver lining to what looks an ominous storm cloud.

Full article on Financial Times (subscription required)

© Financial Times

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