What Does Brexit Mean for Asset Managers?
Our UK Compliance and Regulatory Consulting, Alternative Asset Advisory and Transfer Pricing experts share their initial thoughts on what Brexit could mean for Asset Managers.
"The UK’s relationship with the EU going forward will change and we do not know yet what is certain, at least as far as the rules are concerned, however what is certain is that we will carry on as normal for a time. When the UK gives notice under Article 50, a minimum two-year period of negotiation will follow. This negotiation will be a complex process, but we should not necessarily expect to see a great deal of change in the arena of Financial Services since the UK is likely to adopt most EU legislation in this area.
The UK was a big part of the drafting process for EU Financial Services regulation and will, at least in the short-term, wish to retain much of it. Practically, the Government will not wish to risk destabilizing the Financial Services industry by subjecting it to additional disruption and uncertainty. Much of EU financial services regulation has been in the form of directives, which have already been transposed into UK law and FCA rules. The wholesale adoption by the UK of current EU regulation would ensure the UK’s regime could be deemed ‘equivalent’ to EU rules. However, such equivalence is not automatic and achieving it requires an equivalence assessment by the EU authorities.
The implication for UK fund managers depends heavily on what products they offer and the location and nature of their clients. As many funds and managers raise assets globally, the Asset Management industry has proven resilient to pressures before.
Regardless of whether the UK operates under an EEA model or detaches itself entirely from the Union, AIFMD, MIFID II and MAR would almost certainly continue to apply under UK law after a Brexit. Of course our regulator will have little if any influence on future policy development. However, it’s hard to envisage the UK government having much appetite for further change, given the tsunami of regulation we currently face.
After Brexit, UK managers and funds will become third-country and ‘non-EU fund managers’. The biggest impact will likely be in respect of marketing, solicitation, passporting and operational issues. The future effect on the industry of such issues will inevitably depend on the stance the UK takes in its policy negotiation with the EU.
For some firms, without a pre-existing presence within the EU, it therefore will be necessary to be established in an EU jurisdiction to continue to pursue their business within the EU. While this will inevitably require planning and investment, the good news is that this does not necessarily entail moving lock, stock and barrel to an EU country.
Finally, those foreign firms that have chosen to become fully AIFMD and UCITS compliant by basing their operations, regulatory permissions and status in the UK may need to re-evaluate their operating model. It may be sensible to consider using a European base to set up operations permanently, or until the UK can obtain a third-country passport." Julian Korek, Global Head of Compliance and Regulatory Consulting.
"Alternative Fund managers will have numerous valuation issues to contend with in reflecting the impact of the UK’s exit from the EU. Forthright and transparent communication with limited partners and other stakeholders will be key. The intermediate and long term outlook of private equity and private debt investments – particularly those with exposure between the UK and the EU – will need to be carefully monitored and the impact of their rapidly changing outlook should be reflected in ongoing NAV reporting.
Investments with significant FX exposure will also need to be looked at carefully. Refinancing risks will also be a key consideration if there is a protracted disruption to the capital markets. Inevitably, any capital market dislocation will create a myriad of distressed and contrarian buying opportunities, but such investments are not without risk which will need to be measured and monitored carefully." Ryan McNelley, Managing Director.
“From a tax perspective we are unlikely to see significant change in the short term other than any immediate response to a threat to government finances that flow out of an emergency budget. Longer term, there may be consideration as to the suitability of the UK as a European holding company jurisdiction with the loss of EU concessionary treatment of cross border interest and royalty payments. Additionally, policy makers may be emboldened to use the tax system to provide ‘state aid’ and prevent avoidance where previously restricted by EU rules.” Stephen Rabel, Managing Director.
“Asset investments, with valuation that is affected by cross border regulatory policy, market traded mechanisms and global cost of funding models, would require special attention in a post Brexit world. There will be a need for dynamic macro hedging strategies for value preservation” Manish Das, Managing Director.
“Debt capacity and interest rate reviews for new private equity investments will be a priority.” Danny Beeton, Managing Director.