The road to Brexit: How fund groups are preparing
By Natalie Holt
Financial services firms are being urged to progress plans for coping with Brexit under the watchful eye of the regulators and amid a growing sense of urgency about the challenges ahead.
In the year since the UK voted to leave the EU, providers and fund groups have begun work on the implications of a worst-case Brexit scenario, and how they need to prepare their business accordingly.
Many are analysing the regulatory and tax impact of a post-Brexit world, as well as the business case for relocation and setting up additional subsidiaries. But others are working on the assumption their company will be untouched by Brexit, an approach being challenged by those closest to the technicalities.
Money Marketing examines the complexities and cost, the plans underway and what is left to decide.
Cicero Group executive chairman Iain Anderson says following the election the mood music around a “hard Brexit” (severing ties with the EU and leaving the single market) has changed.
But Anderson says despite the shift in politics, he is not seeing any slowdown in firms’ Brexit preparations. In particular, he says firms are preoccupied with the need to secure passporting rights to allow them to trade freely across the EU.
He says: “I have seen retail players who said very clearly during the campaign that Brexit didn’t affect them, now working out that within their own supply chain it does affect them and starting to think about structure. The safest thing for any firm to do is to prepare plans to continue to access the necessary EU passports.”
KPMG Brexit lead for asset management Julie Patterson says she has also heard of firms claiming Brexit does not apply to them.
She says: “On the wealth management side, although it is quite common for UK wealth managers to have mainly UK clients, some of those clients may have retired to warmer climes and are therefore EU residents. That could be a problem. I have seen some suggestions wealth managers think they can carry on as they are, which is an extremely vulnerable presumption.”
Advisers are also being told to consider how Brexit will impact their business, especially where firms are advising clients overseas.
EY executive director for insurance Ben Reid says: “When you are looking at cross-border business it is important to think of the whole value chain, to think about distribution, the role of intermediaries and advisers, and the future authorisation of those advisers.
“There needs to be clarity around the impact of Brexit on advisers full stop, and I know the adviser trade bodies are working quite hard to develop that argument.”
The role of regulation
Patterson says there are clearly many significant technical challenges associated with Brexit. Examples include unwinding or revisiting existing arrangements that are made more complicated by the UK leaving the EU, such as Ucits funds that are by definition based in the EU, and where a fund based on the continent outsources portfolio management to the UK.
She says: “What we’re dealing with here is a mixture of regulation and trade, so these are quite complex issues.”
Patterson says while Brexit has focused firms’ minds on relocating parts of their business, a tightening regulatory approach to “delegating” responsibilities across the EU was already underway.
Across the industry there is a real sense of purpose that there is something to plan for. That direction has been set by the PRA
She adds: “The key message is the regulatory environment is not going to stand still for two or however many years while Brexit is being discussed. It is going to keep evolving. Negotiations will not be taking place against a regulatory backdrop that is at a standstill.”
Regulators themselves are all too aware of the work that needs to be done to prepare for Brexit. The Prudential Regulation Authority has written to fund groups, banks and providers asking for details of their Brexit preparations. The FCA has also written to major asset management firms.
Reid says: “What has had a real impact here is the regulator’s request for firms to provide them with information on their Brexit contingency plans. That has really focused firms on thinking through both the worst-case scenario but also the potential impact of the different flavours of the trade agreement being developed.
“Some firms are definitely further ahead than others, but across the industry there is now a real sense of purpose that there is something to plan for. That direction has been set by the PRA.”
Jobs, costs and tax
The more lurid Brexit headlines over the last year have forecast a mass exodus of financial services roles out of the City and the UK.
Anderson says the real impact on jobs is more nuanced, but he believes there will be serious overarching questions being asked about how much it will cost firms to stay in the UK, to maintain their business and comply with financial services regulation, what he terms the “cost of capital”.
Anderson says: “Politicians worry first and most about jobs, and the number of jobs moving to Dublin and Luxembourg, for example. In the grand scheme of things, the sense is Brexit will not result in a lot of financial services jobs moving. The real tricky question though is cost of capital. That is the big thing that moves the dial in terms of where people locate, and it is that issue that is finding its way to the board table discussions.”
Patterson agrees higher costs for firms is a likely outcome of the Brexit process, as well as a reduced Government tax take.
She says: “Being in the EU club means you can treat it as a single market. Not being in the club means it will cost more. What we are doing is setting up a hard border, and any border creates extra costs in all sorts of ways.
“There will be restrictions in terms of the things firms cannot do, but even for the things they can, there will at the very least be more administration around it.”
She adds: “It seems inevitable, at least for an interim period, there will be activities moving out of the UK. A follow-on from that is there will be less taxable business in the UK. The question is, how quickly can the UK expand its non-European activity? And how quickly can that expand relative to the ‘lost’ business due to Brexit? That is unclear.”
Overall, regardless of how far firms are down the line in their Brexit plans, there is now a growing sense of momentum, particularly given the 18 months minimum it takes to set up a European subsidiary.
Patterson says: “Quite a few firms waited for Article 50 to be invoked, and then the election was called, so then they waited for that. We have been saying for a long time waiting is probably the worst idea, and that is beginning to be understood.
“The key issue is once firms have decided to do something, invariably that is going to involve discussions with the regulators, and more than one. Very soon what we will have is a regulatory logjam. A lot of the regulators are saying they are putting on staff, but everyone is trying to find extra staff to deal with this. The closer we get, the longer it is going to take.”
Reid adds: “Firms’ contingency plans are in general quite well progressed, and have a significant profile within the organisations. But time really is getting short, and when we consider that 18-month implementation timeframe, decisions on domicile and business model have to be made very soon.”