A potential Brexit no deal for the asset management industry? Keep calm and carry on19 Sep 2018
As the UK Government continues to grapple with the EU over a suitable deal for both parties, Ocorian's Richard Hansford explores how the asset management industry is dealing with being in Brexit limbo.
It is safe to say that it has been an eventful summer for the UK Government. In July, Prime Minster May's financial services white paper was rejected by the EU, leading to widespread concerns from the City that we are heading for a hard Brexit. However, in recent weeks positive noises from Brussels suggest that all is not lost and a deal can be reached.
The rejection of the initial white paper followed unrelenting pressure from the opposition and key backbenchers. This disappointment was then compounded with the resignation of a handful of flamboyant characters unhappy with the handling of negotiations.
Fit for rejection?
The Government white paper was based on the principle of autonomy for each party on decisions relating to the access to its market, with a bilateral framework of treaty-based commitments.
In essence, the white paper proposes that the existing equivalence framework could be evolved to encompass a broader range of cross-border related activities. The Government made reference to the fact this proposal cannot replicate the EU's 'passporting' regime.
However, they also acknowledged that there should be reciprocal recognition of equivalence between the UK and the EU under all existing third country regimes, with this taking effect at the end of the transition period. Future determinations of equivalence should be an autonomous matter for each party.
A no deal nightmare?
With the white paper's proposal initially rejected by the EU, the media bandwagon inevitably rolled out its doomsday narrative. Numerous headlines stated we are heading for a hard Brexit.
Industry associations across real estate and private equity, such as the BVCA, have been very clear on the position of its members. This is that a no deal Brexit would:
"Be a significant issue for the private equity and venture capital industry - for the fund managers as well the businesses they invest in and the people they employ. This is because a no deal Brexit would mean there is no transitional/implementation period and, for those firms that have opted to set up fund management entities in the EU with a 'delegation model' (as permitted under AIFMD), the co-operation agreements between regulators that are required for that model to work, are unlikely to be in place."
Asset manager concerns
When speaking with managers across all strategies, whether private equity, venture capital, real estate or infrastructure; it is clear they have a number of concerns in a post-BREXIT world:
- What will be the UK's access to the EU after Brexit?
- What will (if it is implemented) the transitional period look like?
- How will we recruit talent from other countries?
In light of this, asset managers are also continuing to review their existing operating models. Research by trading venue Liquidnet reveals 83% of managers polled have response plans to such a hard-Brexit scenario, while 49% have already put those plans into action.
In most cases, asset managers began revising their models long before the government published its white paper on financial services in a post-Brexit world. From business-as-usual to establishing operating models in places like Luxembourg and growing substance offshore, we have seen clients pursue a variety of strategies in apprehension of an unpredictable post-Brexit environment.
No quick fix
The concerns of the asset managers have no quick fix. Pair these concerns with the (perceived) fractious relationship between the UK Government and the EU, and it is fair to say that a Brexit no deal would not benefit anybody. The UK would lose and so would the EU.
It is important to recognise that, when compared to the previous two deals which took six and seven years to negotiate respectively, negotiating a trade deal with the EU is more or less impossible within a two year period.
Logic should lead both parties to allow for protracted negotiations post March 2019 ensuring everyone gets the best possible deal. Against this backdrop, clients are still raising funds and looking for new investors. The industry will not stand still but find new and innovative ways to create value for their investors and the assets they invest in.
To learn about Ocorian's full offering across the Alternative Investments spectrum, click here.