Brexit… No panic but some planning required
Posted on 24 Jun 2016
Following the surprise announcement that the UK is to leave the EU some clients and contacts are quite naturally anxious facing so much uncertainty.
So what can we expect for fund and money managers?
The long wait
Like the crossing of the desert the next 40 days will be unsettling as more news follows the big leap into the dark that the UK has just taken. There will not be a second referendum. The Scots are going to try to accede the EU directly and both parts of Ireland will face some turmoil. Fragmentation risk in the UK and the EU is probably the biggest result of this referendum.
This uncertainty will decrease growth and that is the long wait … a lot of this will depend on the reaction of the EU and … indeed the intelligence of the next UK government.
Shall we fear?
Staying positive during those times is essential. We must show stamina as this will be long, since the UK will not leave the EU overnight, it will be two years, maybe even three, or maybe more. We do not know what to expect, but we believe that even though the stock markets have reacted dramatically, the businesses of operating fund management will continue in the usual way. Volatility will make many managers very happy. Hedge funds should gain from this, and if there is no social turmoil there is nothing to fear…
Can businesses move out?
Yes they can, and investment managers may start moving to other EU countries. This may be influenced by what the banks will chose to do. Unfortunately, the next few months are likely to continue to see redundancies especially if there is an attempt to centralise operations potentially back to France or Germany. France however is unlikely to be attractive until it sorts out its political and social crisis, but Germany could benefit from this. It is likely that this will be the second most important impact of this referendum… at least for the financial services sector.
There is no doubt that all pockets of the UK will be affected. It will affect London above all however especially for the asset managers who manage EU funds and / or those who depend on EU distribution. Countries from Malta to Luxembourg will be welcoming any new business. For Laven Partners passporting our regulated umbrella to Ireland, the Netherlands or Malta is a possibility and one which we unfortunately can take if it is required to protect our client base.
No, as for regulated activities nothing will change for two to three years and very possibly forever. The UK has been prominently involved in helping draft EU legislation not least after the financial crisis. Further, if the UK signs trade deals with the EU like Norway, the UK will have to abide by the same regulations, or we will get these regulations from the UK itself anyways, like we have the heavy regulations on the Senior Manager Regime. Effectively there will be little change.
For our clients, especially those using our Digital Compliance Assistant software, this will mean that they will simply flow into whatever compliance changes they need to make. We expect that to grow further alongside the FCA’s determination and guidance. There may be costs when adapting to new regulatory structures but we hope that Laven Partners can help clients limit that .
Impact on fund due diligence?
Investors will need to invest and probably select non-EU focused products or more and more alternative products if the stock markets continue to suffer. If anything, work may increase as the UK either builds a new regulatory system, or fund managers move to new jurisdictions. As such we expect the demand for outsourcing due diligence to grow, notably as banks and investors seek to cut costs, where software can automate much of the work.
Regulated companies will need further assistance with compliance going forward as they enter into new jurisdictions or face a new, unknown, local environment. We have the ability to assist with passporting across Europe, from the UK, and if needed this can be from elsewhere later. For fund distribution the private placement regime will still be very useful, and the UK does not have to be the only point of entry.
We are positive that we will not witness any immediate impact and it will be business as usual just with a twist (namely more strategic planning just in case). The UK will not lose its geographical and time zone advantages, it is still, for now, offering a better tax regime than most other EU nations and has a great legal system.