The year 2016 was full of political surprises, including the Brexit vote. One year on from the referendum, the scope and nature of the deal the UK government will be able to strike with the EU remains unclear, but it seems likely that passporting rights, labour mobility and the management of assets from the UK for clients in the EU will be impacted in some way.
Formal Brexit negotiations commenced on 19 June – almost one year since the UK referendum on EU membership. As expected, the first phase of the negotiations will focus on settling Britain’s financial obligations to the EU and the rights of EU and British citizens residing in each other’s jurisdictions.
Only after this first phase is completed, which is expected by December 2017, will the negotiations move on to discuss the crucial and complex issues of trade and Britain’s future relationship with the EU, including in financial services. As a professional body for investment professionals, CFA Institute is focused on ensuring that any possible adverse repercussions for client interests are minimised throughout the negotiations.
Thus far, there has not been any short-term regulatory impact of the vote to leave the EU and the immediate outflow of capital from UK managed funds in the aftermath of the referendum proved to be short lived. Depreciation in the pound in the period since the referendum provided support to the UK equity market and coincided with a period of improving economic data and increases in asset prices more generally across developed markets. At the same time, growth in the euro area has been strong and employment and price pressures have continued to improve.
Despite these positive signs, uncertainty is still negatively affecting the investment industry. In a CFA Institute member poll on the likely consequences of Brexit, 50 per cent of respondents in the UK thought Brexit uncertainty would remain in the markets for more than two years, compared with only 2 per cent who thought the uncertainty would remain for less than six months.
These results indicate the need for more clarity and predictability over the Brexit process in the coming months to reassure firms, markets and investors. There are several key areas that warrant attention.
Historically, the ‘passporting’ of financial services – the ability to provide services freely throughout the EU on the basis of a single regulatory authorisation in the firm’s home member state – to and from our closest neighbours helped create strong links between the UK and the continent. The UK runs a large trade surplus in financial services with the EU, amounting to some £22.8bn in 2015 according to TheCityUK. The UK is also the largest centre for asset management in Europe. According to the Investment Association, 55 per cent of the overseas client market, or £1.2trn, is managed on behalf of clients in Europe (ex-UK). It is therefore clear that the UK investment industry benefits significantly from the ability to provide services to European clients, underpinned by the passporting regime.