What does being part of the EU mean for each of us, our economy and our country? No matter our starting position, we will all try to consider this question, alongside the available evidence, in order to form a decision on how we might vote on 23 June. But the evidence is incomplete and inconclusive and the unknowns, on both sides of the argument, are thought to be significant.
That is probably why there has been a spread of views expressed throughout the UK asset management sector, with a number of managers coming out pro-Brexit, a number pro-continued EU membership, and perhaps most interestingly, the majority voicing a considered neutrality.
Such neutrality is undoubtedly derived from experience. The regulatory implications for UK-based asset managers if the UK votes to leave the EU on 23 June are uncertain, but should not be insurmountable. Provided the UK retains the talent on which the UK asset management sector is based, the long-term prospects for the sector in the event of exit are unlikely to be affected. The sector has continued to grow notwithstanding the enforced EU regulatory changes over the past few years and is sufficiently nimble and adaptive to cope with a challenging regulatory environment.
From a manager’s perspective, the short-term consequences are already unsettling. We are seeing the usual disruptive effect of an unknown future on markets, and the knock-on effect on fund performance and assets under management, and this is unfortunately likely to continue until at least June, with the uncertainty continuing beyond then in the event of an exit vote. This undoubtedly presents a much greater concern to managers than how to address the regulatory environment in the event of an exit vote.
The loss of EU passporting rights following an exit would be more important to some UK-based asset managers than others. For managers with a UK-centric business, the ability to open a branch in the EU, or to market their products and services on an EU-wide basis, is probably not crucial to the short-term development of their businesses. For them, the ability to passport perhaps doesn’t represent a good deal when balanced against the continued flow of legislative changes from the EU, which represents added expense, to both them and their investors.
For some, EU policy to date has failed to recognise the diversity of the UK asset management sector in terms of product development and asset class. However, how much these businesses will benefit from an exit vote is debatable as many of the rules will continue to apply, at least in the short to mid-term, either through continued membership of the EEA or as a result of a natural timeline in the development of UK domestic policy. EU rules, including new rules yet to be introduced, will continue to apply for a period of time but with ever diminishing influence of the UK and its representative industry bodies on the development of those rules.
For others, the loss of an EU marketing passport in respect of their products could represent a challenge throughout the transitional period to an exit. Whether or not the UK will remain part of the EEA and how much there will be a divergence between EU rules and UK domestic policy post-exit are important questions but the answers are likely to be politically driven both at the UK and EU level. In modern politics, domestic policy can change quite significantly in relatively short timeframes. This would be an interesting challenge for civil servants who have experienced limited flexibility in law-making within the financial services sector for a number of years.
Most businesses, across all sectors, do not have time to sit and wait for the answer to the main questions in the event of an exit vote on 23 June. An exit vote may result in asset management groups restructuring their businesses somewhat, with a shift in resource into the EU, and probable restructuring of certain fund products, to ensure continued access into the EU market. Asset management houses probably need to consider the shape of their business in years to come, almost on a product by product basis, and determine the steps to take in order to get there.
My main concern is whether short-term disruption will mean an outflow of talent from the UK. The UK asset management sector is the global leader and that position is based on, amongst other things, the quality of people working within it, both UK and non-UK who have come here to work. A net migration of talent out of the UK could be more damaging than figuring out what the new regulatory landscape might be.
Alex Haynes is partner at Stephenson Harwood.