Three weeks ago, on the anniversary of last year’s EU referendum, I wrote that we were little closer to understanding how exactly Brexit is going to affect the UK funds industry. The domestic news agenda has changed little since that point, but actions on the continent are beginning to ring some alarm bells.
In the absence of clarity on the UK’s negotiating position, fund firms’ preparations can give the appearance of a smooth, unhurried process. The assumption is that the ultimate damage to asset managers, and fund buyers, will be minimal: a few back-office staff moved, and workarounds put in place should it become harder for UK buyers to invest in funds domiciled elsewhere.
Hence moves like Aberdeen’s decision last week to hire a head of Luxembourg. This kind of job title is going to become a lot more prominent, but in itself it will have little effect on domestic industry structure.
By focusing on these developments we may be falling into the trap of paying too little attention to the actions of the other negotiating party. Last week also saw the publication of a new ‘opinion’ from the European Securities and Markets Authority (Esma). The comment was the most significant sign yet that EU authorities are looking for more than window-dressing arrangements from fund managers once the UK leaves the EU.
It said that national authorities should closely scrutinise situations where firms – even smaller businesses – do not “dedicate at least three locally based full-time employees (including time commitments at both senior management and staff level) to the performance of portfolio management, and/or risk-management functions, and/or monitoring of delegates”.
Esma also warned against firms that continue to run “substantially more” of a fund’s portfolio or risk-management functions in their home country following relocations.
This looks like the first move in the direction of the Brexit outcome that UK fund firms fear most: a tightening of “portfolio delegation” rules that would ultimately require not just back-office staff, but also fund managers themselves to relocate to the EU.
Not for nothing did FCA chair John Griffith-Jones tell the City this month to prepare for the “hardest of hard Brexits”. The repercussions of a change to these rules would be an order of magnitude more significant than those currently being contemplated. Would managers move, or would replacements have to be hired? How would fund buyers feel about losing their regular access to these managers? If it came to this, neither answer would be a positive one for the UK industry.
Dan Jones is editor of Investment Adviser