Since the British government triggered Article 50 in March 2017, the European Securities and Markets Authority (Esma) has warned UK-based asset managers to be prepared in the event that the UK crashes out of the single market without a transition arrangement or deal in place.
One year on and the clock is ticking. The UK is scheduled to depart the EU at the end of March 2019.
“We hope the negotiations [between the UK and the EU] result in an orderly exit but we cannot presume arrangements will be in place by March 2019,” says Steven Maijoor, chair of Esma. “We have made it clear that market participants, including UK asset managers, need to prepare for that situation.”
A ‘third country’
UK-based asset managers enjoy ‘passporting’ rights as part of the EU single market allowing them to sell services across the EU without regulatory barriers. But in the event of the UK leaving the EU in March 2019 without a deal or transition arrangement in place they would need to establish subsidiaries within the EU and apply for a local licence to continue selling to clients within the bloc.
Under this scenario, the UK would be classified as a ‘third country’ – like the Canada, Norway and India – with limited areas to EU markets on a unilateral basis where there is regulatory alignment.
“We hope the negotiations [between the UK and the EU] result in an orderly exit but we cannot presume arrangements will be in place by March 2019.”
Such an outcome could have hugely costly implications for Britain’s financial services industry. More than 4,000 asset managers are registered in Europe employing 100,000 people – with close to 40% of workers based in the UK.
In January, UK fund manager M&G Investments began transferring the assets of four UK-domiciled open-ended funds to its Luxembourg platform.
The number of asset managers that have moved operations so far has been small, Maijoor says. “But the closer we get to March 2019 [without an arrangement] the more likely it is that the number will increase.”
Maijoor said it was up to individual asset managers to decide if or when they needed to begin moving operations. “It’s not for us to predict how the negotiations will go but we should know whether there will be a transition regime in place later this year,” he says.
“Some smaller market participants may be able to move relatively quickly but larger operations will find it more difficult.”
Consistent approach
In the event that UK-based asset managers do relocate to other areas of the EU, Esma is seeking common regulatory standards across the other 27 nations on how these moves will be handled.
“We have issued opinions to ensure a common understanding across board members on how to receive relocated activities,” Maijoor says.
A supervisory co-ordination network has been established by Esma to encourage the EU 27 “share experiences” on the relocation of activities.
“It’s important we have sufficient measures to ensure supervisory consistency,” Maijoor explains.
“The vast majority of day-to-day supervision will be at national level and not EU level. Therefore, we need strengthened powers to ensure consistent standards across the EU 27 covering issues such as ‘delegation’ rules and outsourcing.”
Delegation rules
More than 90% of EU assets under management make use of ‘delegation’ rules which allow a fund registered in one country to outsource its asset management to another country.
Most European funds are registered in Dublin or Luxembourg, but a lot of asset management takes place globally, with the majority ‘delegated’ to London.
Last year, Esma, published an opinion paper suggesting national regulators should take a tougher line on policing the asset management sector after Brexit – particularly in relation to ‘delegation’ rules.
“Esma supports delegation as a business model,” Maijoor continues. “We just need to make sure that there are appropriate safeguards.”
Maijoor said Esma will discuss the implementation of delegation rules with its UK counterparts soon. “But obviously this needs to be taken into context of broader [Brexit] negotiations.”
Assets under management in the UK total about £8trn (€9trn) and in October, the UK government set up a taskforce to manage the impact of Brexit on the asset management industry.
Esma is also reviewing the directive on Ucits — the rules on mutual funds based in the EU – which do not have a third country arrangement. “Ucits is clearly an area where you can expect considerable adjustment issues,” Maijoor adds.
