On Wednesday 29 March at 12:30 pm, Sir Tim Barrow will present THE letter to the European Council informing the EU that the UK decided to “withdraw from the Union” (article 50 (1) TEU). Rumour has it though that the European Council is ready to react within 48 hours following the reception of the letter. In the meantime, the Brexit negotiations team led by Michel Barnier is working on the content of the next deal through technical seminars (EU citizenship, customs control and procedures…) and meetings with MSs’ representatives.
Although Theresa May said that “(the)Agreement may take in elements of current Single Market arrangements in certain areas (…) the freedom to provide financial services across national borders”, the future of financial services in the UK (passporting rights, application of EU regulation in terms of financial services…) is far from being clear.
On their side, fund managers are getting more and more anxious. And for good reason: in an article published on the 26 of March, the Financial Times points out the main concerns for the financial industry. A study from the London School of Economics estimates that around £ 6 bn of the revenues earned by UK Investment funds (a quarter of the global revenues) are coming from Europe. Half of the sector could potentially move outside of the UK following Brexit. The British government is fully aware of the risks, as underlined by Theresa May in her speech. A full exit of the Single market would “jeopardise investments in Britain by EU companies worth more than half a trillion pounds. It would mean a loss of access for European firms to the financial services of the City of London.”
What worries Investment Funds is whether and under which regulation they will be able to access EU clients and what the new barriers to the freedom of capital would be.
The first question is whether Brexit will hurt the distribution of retail funds… Under the UCITs regime, a fund can be regulated, sold and managed in different countries. With Brexit, UK asset managers might not be able to sell their funds in Europe.
Another important question relates to institutional investors (pension funds, insurers…). The question is whether MiFID, the EU directive which regulates the distribution of investment services within the EU, will be part of the new agreement between the EU and the UK. If not, UK asset managers will lose their MiFID license and will not be able to access European clients (from the UK).
A third question is how hedge funds and other alternative asset managers will access clients based in Europe? Although there were plans to allow non-EU managers to sell their funds across Europe, it seems that the amendment of the Directive on Alternative Investment Fund Managers (Directive 2011/61/EU) has been stopped since Brexit. Here again, the question is whether this directive will be part of the new agreement. Questioned by the Financial Times, the Association for Global Alternative Asset Managers pointed out that three quarters of European hedge funds are managed from the UK.
After Wednesday, the EU institutions (the Commission in particular) will speed up the negotiations and a new agreement will have to be reached within 2 years…In the meantime, we will have to “wait and see” as the English say…
Read the Financial Times article here