What options do UK fund managers have to minimise dislocation and disruption post-Brexit?
The most obvious answer is seemingly to relocate staff to mainland Europe. In a study conducted for the Financial Times by PricewaterhouseCoopers (PwC) in 2016, following the vote, 85% of respondents felt it would be necessary to move London-based investment staff into the EU. The same study found nearly a quarter were planning to execute this strategy, while 7% were in the process of doing so already.3
The UK has promised to enshrine existing EU laws into UK legislation at the point of departure as part of the "EU Withdrawal Bill". This should allow the country to obtain equivalence, at least for a transitional period. The dilemma for EU policymakers is trying to find out what the UK will do after this point. If the UK disregards EU regulation and/or introduces arbitraging rules, equivalence may be cancelled with limited notice. Arbitrage would also mean fund managers have to comply with an additional regulatory regime at extra cost.
For UK managers with EU investors, there may be a strong business case to relocate. Regulators from the European Securities and Markets Authority (ESMA) have told industry conferences hosted by the Association for the Luxembourg Funds Industry (ALFI) and the Alternative Investment Management Association (AIMA) that substance is essential if UK firms want to continue selling their products to the EU investor community. Larger UK fund managers will often already have a presence in the EU, outside of the UK, and many are already investigating organisational options. The Financial Times reported, in May 2017, on the plans of some of industry's largest groups (including M&G, Legal & General and US groups such as Blackstone) to establish a stronger presence in continental Europe.4 Of course, many alternative assets funds are of a different scale entirely and may not have a presence beyond a London base. But what will these groups need to do?
UK fund managers want to understand exactly what will be required of them and, in the face of uncertainty, are keen that they be given sufficient notice and enough time to carry out any required activity. As one UK fund manager put it: "We have heard from some EU regulators, such as France, that UK fund managers need to have "substance" if they want to keep running EU money. This may entail opening an office and hiring between five and ten people. Hiring new staff in a third country takes time, resources and planning. It is hoped any transitional agreement will give managers time to make these adjustments, if needs be".
ESMA's 13 July 2017 Opinion to support supervisory convergence in the area of investment management in the context of the United Kingdom withdrawing from the European Union5 lays out a number of observations and guidelines (71, in total) for national competent authorities (NCAs) to consider when dealing with the anticipated increase in activity in the EU27 as firms based in the UK – or which would otherwise have chosen the UK as their home – seek alternative jurisdictions from which to operate.
Bobby Console-Verma, Managing Director of MJ Hudson | Fund Management Solutions, has recently launched an office in Luxembourg to provide an outsourced solution for relocation into the EU. Console-Verma explained that "the office was set up in response to strong demand from fund managers for an alternative solution to opening a physical office of their own. We can provide that for them in a shared lower cost environment. We are providing a full AIFM platform from Luxembourg, just as we have been in the UK". Console-Verma also noted that the time required to build a team, find an office and receive authorisation from the Luxembourg regulator can be significant.
I'll be your baby tonight
There is no single EU jurisdiction likely to emerge as a financial powerhouse from Brexit, and there appears to be fragmentation in where UK firms are setting up EU entities or subsidiaries.
"Fund managers such as M&G have chosen Luxembourg to expand their cross border business, others are considering Ireland. A lot of countries including France, Germany, Italy and Malta have said they are ready to service UK business. But it is not just asset management. Insurers and banks are having to set up operations in the EU, as well. For example, Lloyds has just announced it is setting up an office in Brussels while AIG is expanding in Luxembourg. Investment banks are considering Frankfurt given its proximity to the European Central Bank (ECB)," said Camille Thommes, Director General of ALFI, the Luxembourg fund industry association.
I still haven't found what I'm looking for
Beyond the options listed below, most other financial centres in the EU have the required infrastructure to domicile and operate a fund. Brussels, Milan and Stockholm, for example, each host a thriving funds community, although these tend to be used by domestic, rather than international managers
Amsterdam: Some 400+ years of trading experience and the local regulator's similar outlook to the UK's FCA speak for superbly-connected Amsterdam as a strong choice in the EU27
Dublin: Europe's largest hedge fund domicile and a significant base for UCITS products. The common language helps make Dublin a contender for UK groups
Luxembourg: Already the largest investment fund centre in Europe, Luxembourg is a draw for funds and investors in Europe and well beyond. More than 20% of assets managed are private equity, real estate and other alternatives
Paris: Quite apart from its significant cultural draw, Paris boasts several of the world's largest financial institutions and a highly educated and experienced asset management workforce
Frankfurt: As well as proximity to the European Central Bank, Frankfurt is home to a sophisticated and longstanding financial services infrastructure
Malta: Sunny Malta has long been a popular jurisdiction for hedge funds and provides a domicile to funds with a combined net asset value of €9.8 billion across all asset classes
Step by step
If the decision is made to open an office outside of the UK, there are a series of steps that need to be taken to ensure the right approach is chosen.
- Look into an outsourced solution
A simple solution can be to use the existing infrastructure of a specialist provider of fund management solutions. For example, MJ Hudson offers this service in Luxembourg. As well as saving time and costs, using a professionally managed solution can deliver improved service and gives investors comfort, particularly for newer funds or strategies.
- Assess your investor base
Where are the investors located and what type of investors are they? Fund managers will want to ensure that any new domicile is acceptable from a regulatory, tax and governance perspective and that it is accessible to both investors and other relevant parties.
- Consider your asset class
The requirements of a high frequency trading hedge fund, a retail fixed income fund and an emerging markets infrastructure fund are going to be very different and jurisdictions should be assessed accordingly. Speaking to local lawyers and peers is often helpful, and can identify any potential issues.
- Speak to your team
Some locations are simply going to be more attractive to incumbent and prospective team members. London is hard to beat on this front, of course; the city remains a strong draw. A London-based manager or investment adviser with funds located in other favourable jurisdictions is a strong double-act.
- Evaluate the infrastructure
Locations with a thriving infrastructure and industry community are often easier places to work, allowing for easier networking and, typically, making recruitment less burdensome. If the local banks understand the industry, it will make many of the administrative functions of a fund manager much more simple and efficient
- Take advice on the regulatory environment
Although the EU27 must necessarily have enshrined the same EU legislation in domestic law, how this is implemented is not identical and some jurisdictions, and their financial markets supervisory bodies, may have quite different interpretations of key aspects. Professional advisers (legal, tax, compliance) will be able to assist in this regard.
MJ Hudson's Brexit Report: Volume 2 can be downloaded at https://www.mjhudson.com/wp-content/uploads/2017/09/MJ-Hudson-Brexit-Report-Vol2.pdf
Footnotes
3 https://www.ft.com/content/ba97728a-b00e-11e6-a37c-f4a01f1b0fa1
4 https://www.ft.com/content/7d22a7cc-4202-11e7-82b6-896b95f30f58
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
