Fund industry braced for Brexit chaos

Fund industry braced for Brexit chaos

The asset management industry has begun bracing itself for a toxic cocktail of regulatory uncertainty and investor risk-aversion as the UK opted to abandon its membership of the European Union last week.

The decision to end a 43-year relationship with the EU – and possibly its single market – means fund houses could now face a struggle on several fronts.

Listed asset managers were hard hit on Friday as markets slumped in reaction to the vote, with share prices dropping by double digits due to the potential for prolonged negative investor sentiment, as well as legal and regulatory uncertainty.

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Asset managers were hoping that a vote to Remain would put an end to what had already been a poor year for fund flows, but that wish now seems unlikely to materialise.

Columbia Threadneedle said it was anticipating dampened investor flows in the wake of the vote.

“We expect the period of change caused by the UK’s exit from [the EU] to have a negative impact on market sentiment globally, and this is likely to have a dampening impact on investor flows across the industry,” a spokesperson said.

Mark Pugh, UK asset management leader at PwC, said the resultant market volatility was “particularly pressing” for fund houses given the impact on firms’ products.

“Some listed UK asset managers will be worried about the combined impact of volatility on their own share price alongside the impact on the value of the assets in their funds,” he said.

Any shift towards a period of sustained outflows could provide stern tests of fund liquidity as well as commercial viability.

Mr Pugh added: “Hand in hand with [market pressure] will be liquidity concerns for funds, especially if there is a run of outflows over a long period of time with no market correction. Regulators have been focused on liquidity risk for some time, but those who prove unequal to the task can expect further scrutiny.”

Aside from market concerns, regulatory and legal issues over the UK’s future relationship with the EU’s single market will remain at the fore.

Speaking to Parliament before the referendum, Investment Association (IA) interim chief executive Guy Sears said a departure would cause “massive disruption” to the UK asset management industry.

Mr Sears said leaving the EU could be problematic because the UK would become a “third-party country”. UK-based Ucits would become “alternative investment funds” and subject to more onerous distribution agreements.

Asset managers wishing to sell to their European markets will also be considering the possibility of redomiciling funds or even businesses in a bid to ensure ease of access.

More broadly, the UK will also have to show ‘equivalence’ with EU regulations in order to sell into the bloc. Mifid II regulations would, therefore, still have to be fully accepted by the FCA.

In a statement on Friday, the FCA stressed all regulation would remain in place until Parliament made any changes. It also committed to continue implementation of any legislation yet to come into effect, such as Mifid II.