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Brexit: Challenges And Choices For UK Wealth, Alternative Investment Firms

Rosalyn Breedy, 5 June 2018

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The opportunities and problems thrown up by Brexit for wealth managers are many. This article considers the terrain.

The Brexit process is – at least at first sight – anything but an easy process, but whatever the issues, the wealth and wider investment industry needs to figure out the implications of the UK decision tog et out of the European Union. Much depends on whether the country chooses a “hard” or “clean” Brexit – leaving the Customs Union and Single Market, accepting World Trade Organisation terms and freedom to engage in trade deals with any non-EU nation, or a “softer” version, with continued membership of the Customs Union/Single Market and some limit on trade negotiations, as well as continued authority for certain bodies such as the European Court of Justice. Some in the UK wealth management industry fear a hard Brexit will make it harder for UK firms to do business in Europe; while others – as this publication has occasionally heard – say that increased complexity makes more work for the sector.

Rosalyn Breedy, partner at Wedlake Bell and a frequent commentator for this publication, considers the issues. The editors of this news service are pleased to share these opinions and invite readers to respond. Email tom.burroughes@wealthbriefing.com

Background
Last July the European Securities and Markets authority instructed EU 27 national regulators on the need to deliver a consistent supervisory approach to investment management. As a consequence of which UK investment managers  looking to move to  a "light - touch "  jurisdiction will find their ability to do so severely constrained. UK managers will do well to read the opinion as it also provides a good summary of the Brexit challenges faced by UK wealth and alternative investment managers.

The challenges in the opinion and elsewhere are as follows:

•    Timing-  the opinion is expressed to take effect on the date of entry of the withdrawal agreement , or failing  such agreement 30 March 2019 so UK managers need to identify their Brexit implications and make plans now;

•    The UK becomes a ‘third country” as far as the EU is concerned from the effective date. This means that (a) UK wealth managers cannot service EU retail investors from the UK (b) UK UCITS will either need to be rebadged as non-EU AIFs and offered under the AIFMD directive or UCITS set up in an EU member state (c) national regulators will  review delegation arrangements under UCITS and AIFMD regimes to check that the reasons for delegation are objectively justified, that the delegation does not allow for circumvention of investment legislation and is properly carried out;

•    National regulators will also be required to review the substance and activities of EU management companies and platforms offering outsourced services to third country managers.

•    UK managers will face the implementation of over 12,000 EU financial services regulations and nearly 8000 UK statutory instruments dealing with EU financial services regulation into UK law in addition to reasonably foreseeable relevant  future EU regulations;

•    Lack of clarity as to the position of the UK with regard to non- EU countries where rules of engagement where previously governed by the fact that the UK was a member of the EU.

•    UK managers will shortly be brought into the Senior Managers’ and Certification regime at a time when they may be overseeing relocation of functions and the implementation of outsourcing arrangements;

•    Nearly one in five city of London workers are of EU origin and will need to decide  during the transition period whether or not they and their families wish to continue to live and work in the UK

•    UK Managers have traditionally been very reliant on the EU talent pool will need either to hire and train more UK applicants and /or become au fait with the sponsor visa programme;

•    UK managers who decide to establish a presence in an EU 27 country and who currently don’t have a presence may decide to joint venture or acquire a business as opposed to establishing and hiring from scratch. The EU 27 countries differ significantly in relation to employment laws, social security, pensions, direct taxes, application of VAT. Managers looking to relocate senior staff will need to review their employment contracts for mobility clauses and so on; and

•     Implementation and communication of changes in contractual documentation, reporting, and systems all need to be assessed similarly consistent engagement may now be required with more than one regulator who may adopt a differing approach.

Recommendations
UK Managers need as a matter of priority to conduct a Brexit impact assessment if they haven’t already and to determine whether or not they need to establish a presence in an EU member state. If they do need to establish a presence the key questions are in which state and by what means. It is not always the case that the regulatory environment most like the UK yields the best result with regard to the costs and ability to provide services. Key staff may also not wish to relocate to certain jurisdictions.

Consultation with relevant stakeholders and careful evaluation of outsourced providers is key.

The establishment of a framework approach will enable managers to provide a consistent approach to clients, counterparties and regulators. The framework approach incorporates all the applicable rules and provides comprehensive approach to risk management and governance as opposed to minimum standards of local compliance and heavy reliance on reverse solicitation by alternative investment managers.

UK managers should also take the opportunity to review business processes, outsourcing and see whether technology can be used to cut costs and artificial intelligence to  enhance service offering.

UK managers who can adapt well to the post-Brexit environment have the ability to seize new business.  

 In short Europe faces an aging population and a significant amount of pension provision is still provided by governments facing funding shortfalls.

New pension investment products are needed to address transfer of government and employer liabilities into defined contribution schemes and to mitigate the longevity challenges.

Brexit obstacles are addressable.
UK managers have the experience and expertise to address EU pension funding  challenges and the opportunity to expand business  is significant should UK managers choose to embrace their Brexit adaptation.

 

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