The European dream of managing investments in the EU has become more challenging but Ireland continues to benefit.

A full fiscal quarter into the UK’s new third-country status with the EU, and wealth managers are keen to articulate how they are positioning themselves to pick up new business.

UK discretionary investment managers can no longer serve financial advisors and their clients operating in Europe without a physical presence there, creating plenty of opportunity for client assets and investment teams to change hands.

“One of the main reasons we left Rathbones is that they haven’t got an EU proposition and a MIFID licence,” Maurice Keane, managing director and head of International business at Tilney Smith & Williamson, said, explaining some of the new dynamics.

He and Jeremy Bezant joined Tilney’s business team last year to focus on developing relationships with IFAs through its newly acquired Dublin subsidiary. The firm gained the Irish wealth business after merging with Smith & Williamson last September, giving the new venture an important gateway for booking investment transactions and providing international IFAs with wealth advice.

Roughly half of financial services firms have moved some operations to Europe because of Brexit. According to EY’s brexit tracker, the decision to leave the single market has caused £1.3 trillion of assets so far to leave UK shores for Europe.

Through March 2021, Dublin remained the most popular destination for staff relocations and new European offices; 36 financial services firms have established new operations there in the wake of Brexit.

While some UK-based discretionary investment managers have lost ground in Europe, Tilney Smith & Williamson has been using its Ireland base to pick up new business.

“There is a lot of scope,” Keane said, and as the model grows, “the whole business plan will be under review at all times.”

Ireland’s legal and regulatory framework is similar to the UK's, and for UK-based asset managers it offers a good cultural fit.

As the chances of a favourable financial services agreement between the UK and the EU has become a guessing game, firms have been weighing up what to do in the mid and longer term.

The two sides have agreed a memorandum of understanding in recent weeks but this is a long way from the UK being granted equivalency rules. The MoU merely commits the parties to meeting twice a year to share any regulatory changes that might impact either jurisdictions and to create a framework for negotiating new terms, however long that might take.

Any UK manager that hasn’t made contingencies and is holding out for favourable terms is likely to be disappointed in Tilney’s view.

“It is a big risk and a lot of firms, larger ones like M&G and a few others, have just gone with the decision to say 'I will set up a European business in Europe',” Jeremy Bezant said.

The firm says its position is "preferable," with booking volumes to support that. Assets under management at the group have risen by 220 per cent since last August, with new monies mainly coming from international IFAs and pension trustees from around Europe, with a big market in Spain and Portugal.

“Unless there is an absolute shock on equivalence, we don’t see that slowing down at the moment,” Keane said.

The group has also seen some transfer of allegiances from UK-based asset managers into the brand.

“The IFAs we are working with are now saying, can you be our DFM for everything? You’ve got the UK, you’ve got Jersey, you’ve got Ireland, and you can do different currencies; you’ve got funds as well as direct personal investment management solutions. You also do sustainable, so you have everything I need,” Bezant said.

The degree of certainty offered by the Ireland franchise, and the fact that Ireland is known as a centre for wealth and funds, has made it an attractive pan-European destination. Its corporation tax for the time being remains highly competitive at 12.5 per cent.

“There are a limited number of firms sitting in our situation, and some of these big pension trustees, individual clients, and IFAs are making the calls,” Keane said. “Also, once the relationship is embedded, it becomes really sticky. We rarely lose a relationship to a competitor,” he said. Pension trustees in Cyprus and Malta are among those seeking its services.

 

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Many firms have been increasing their presence in Ireland. In March, IQ-EQ said it was expanding operations with the launch of a dedicated funds business in Ireland.

A raft of fintechs have set up European headquarters in Ireland, not just in Dublin, but in Kildare and Limerick and further afield across the Republic. Barclays Private Bank is another using its Irish storefront to ramp up services to its European clients.

Although the private bank maintains wealth management hubs in Monaco and Switzerland, it said plans to grow activities in new European markets will go through its EU-licensed Dublin platform.

A couple of years ago, Investec sold its wealth management business to Brewin Dolphin, although the firm held on to passporting rights by establishing Investec Europe as a MIFID subsidiary to run its other financial activities in Ireland.

Around 14,000 funds are currently administered from Ireland representing around €5 trillion in assets. Ireland is also the leading centre for European exchange traded funds, with 50 per cent of the bloc’s total ETF market.

EU Commissioner for Financial Services, Mairead McGuiness, is keeping a close watch on what direction the UK will take as its strikes out on its own. She has been abundantly clear that the EU is in no rush to hand the UK a package of equivalency measures. There will be no “oven ready” plan, as the UK prime minister had suggested, and “I am not a light-touch commissioner,” she said.

A new listings regime endorsed by the Treasury this month to attract more companies to list on London exchanges and plans to boost UK fintech prospects have begun to signal the UK’s global position in this new financial services era. Some of the recent moves by Westminster have rattled the EU and the degree to which the UK plans to diverge.

Even so, Bezant believes that the EU has the stronger hand.

“If it doesn’t give the UK access, it can build its own wealth management solutions and keep the tax dollars.” This is the reason behind much of the delay, he said.

“We are running with the assumption that an equivalence decision won’t be made any time soon. If it does, it will be years,” Bezant suggested, using the Swiss stock exchange agreement as an example. “After years and years of negotiations, they got a year of equivalence, and it ran on a year-to-year basis, and the Swiss said, we can’t operate like this….”

“If you build your European franchise from London on the assumption that equivalence is going to be given, and it is going to stay, then fine, you are very brave. But we don’t think that’s a good business model. We can’t suddenly, three months down the line, tell all of our clients they have to go somewhere else,” Bezant said

Opening up a fully-fledged subsidiary in a European base, however, is not a cheap exercise. The gamble is that by doing it now, you may be too late.

“A lot of firms in different areas of financial services are trying,” Keane said, and it is creating a massive backlog, “even for registering funds right now.”

It is difficult on a cost basis and the regulators are quite tough on UK firms, he added. “You will never get away with a post box now.”

For a European hub with real boots on the ground, Luxembourg is looking for 10 to 15 people for the equivalent of a fully-owned subsidiary start-up, Keane said. “You also have to factor in that you are late to the game, so the opportunity size is smaller."

If firms want more than a sales and marketing presence to manage money, that requires a lot of infrastructure, a compliance officer, suitably qualified investment managers, and so forth.

“And this is into an environment where the salaries are higher and the real estate costs are now a lot higher than they used to be because everyone is in Dublin now. In fact a lot of firms are moving out of Dublin because it is too expensive,” Bezant added.

“There is massive cost to set up and you’ve got to have those people in an office, paying their salaries for about six months or more of that time, without being able to do any business.”

“Where other managers have been successful, and it has been the larger ones, is where they have planned ahead and thought, 'you know what, this is not going to go well, we will put the infrastructure in place now, and it is going to take one or two years.' And they were ready and they were right,” Bezant said.