Brexit – an Asset Management Deal

With Brexit less than a month away and no deal signed at time of writing, even the most optimistic remainers have to accept that a no-deal Brexit is, at least, a distinct possibility if not a strong probability (although, even at this point, it’s not the only potential outcome).  That’s the bad news.  The good news is that while the UK continues to debate with the EU itself, EU members are working with the UK to find a solution for the asset-management industry.

The background

Prior to the days of the EU, if a financial-services company wanted to do business in more than one European country, it had to obtain any necessary authorization from each individual country in which it wished to operate.  The EU, however, introduced a “passporting” system, which meant that a financial-services company which was authorized in any one of its member states, could use that authorization to do business in any other member state.  This allowed the UK financial-services sector to expand into the EU – and it also allowed financial-services companies based in other EU countries to expand into the UK.  This may have done a lot to motivate at least certain EU member states to start making their own bilateral arrangements with the UK.

The agreements as currently stand

A memorandum has already been signed between the UK’s Financial Conduct Authority and its counterparts in the rest of the EU.  This allows for the continuation of delegation arrangements, meaning that funds can continue to be managed outside the country or countries in which they are available for purchase.  This in itself can be considered a major win for the asset management industry, which has developed significant reach in Europe.  France, Germany, Italy and the Netherlands have already made amendments to their domestic laws to make it easier for UK companies to continue to trade in these countries post-Brexit.  Germany is drafting further changes to its laws, Finland and Luxembourg are also preparing to make relevant changes to their legal system.  On the flip side, the UK has created a “temporary permissions regime”, which basically allows EU fund managers to continue to sell investment products to UK customers once the UK leaves the EU.

The way forward

As the old saying goes – hope for the best but prepare for the worst.  In practical terms, this means that while asset managers can certainly cross their fingers and hope that passporting rights will be maintained somehow, they should also be preparing for their loss.  To put the matter simply, working to improve the possibilities offered by the concept of equivalence does not mean conceding defeat on the matter of passporting, it just means accepting that defeat is a possibility which must be considered.  One major issue with equivalence is that there is currently no agreed definition of it, which, not to put too fine a point on the matter, raises the spectre of all kinds of potential issues being discovered when what is currently, really, only a theoretical concept actually becomes a practical reality.  Another major issue is that under current EU rules, a member state can revoke a declaration of equivalence with only 30 days’ notice.  Put these two facts together and it becomes only too easy to visualize a scenerio where one state becomes frustrated with another to the point where they simply pull the plug on the equivalence declaration.  Having said that, however, any member state which did so would have to take it as read that the UK would do likewise and if this did not have the desired effect might look to apply pressure in other ways.  That being so, it is to be hoped that the EU will work to develop a robust equivalence system if passporting ceases to be an option.