InvestmentsJun 28 2016

Fund industry braced for Brexit chaos

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Fund industry braced for Brexit chaos

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.

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.

But it added: “The longer-term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future.”

The IA called for calm among its members and stressed EU rules and regulations remain unchanged.

“The focus in the short term will be on how markets respond, but it is important that we adopt a collective long-term focus on how the UK can preserve the pre-eminence of its financial services sector, including our highly successful £5.5trn asset management industry,” the trade body said.

Ucits managers thrown into domicile difficulty

An issue highlighted by Investment Association interim chief executive Guy Sears earlier this year is Ucits fund designation: the structure can only be domiciled in an EU country.

FTI Consulting warned leaving the EU would impact the UK industry’s use of Ucits. It said the industry could reach an agreement with the EC on replicating a Ucits structure, but full compliance would still be needed for a range of regulations.

Report author Hans Hack wrote: “For managers who use the UK as a base from which to passport, a settlement that permits the UK to remain a domicile for Ucits would need to be negotiated. Without it, managers would have to be redomiciled and seek re-authorisation, or cease to continue as Ucits.”

Any agreement would mean the UK fully complying with the Ucits regime, the consultancy suggested.

Key numbers

37%: Proportion of EU fund assets managed from the UK

8.4%: Initial fall for the FTSE 100 after the referendum result was announced