WMA: Brexit could ramp up UK regulation


David Cameron’s announcement of a date for the referendum on 23 June has sparked debate in all quarters on the pros and cons of a Brexit. Boris Johnson’s intention to vote for out has galvanised the situation.

According to one newspaper: “Boris has turned a dull campaign into Star Wars.” There will be more such hyperbole and extravagant claims from either side in the coming weeks.

How does all this affect the staid world of wealth management? What would happen in this sector in the event of a “no” outcome? Much will depend on how the Government negotiates post-referendum relationships at the macro level, and on how the legally permitted two-year or “phoney war” period between the vote and changes actually having to happen would be used. But there are areas of concern that can already be identified.

UK-based firms with clients in other member states (the client totals are perhaps around 3 per cent of all WMA firm clients, so the numbers are not massive) would be at risk of losing their EU passporting rights.

Currently their UK authorisation allows remote or in-person access to clients in other member states subject only to notifying the local regulator.

There is no need for additional registration. Home state (UK) prudential regulation applies,  although conduct of business with a client is governed locally.

Without EU membership such passporting could not take place; firms would have to establish a subsidiary in an EU country from which to access all their EU clients. This would be authorised and regulated in that country and not from the UK.

It would be expensive to do, regulation might be less sympathetic than in the UK and there would be tax implications. Furthermore, smaller firms would lack resources to establish in another member state and might be forced to give up clients to competitors, merge to secure greater scale, or to be taken over by a continental business that would manage their UK clients from the UK but manage the EU ones from its home state. This would switch the HQ out of the UK with adverse consequences for the UK industry.

UK-based firms with clients in third countries might also find access to those clients obstruc-ted. For example, if the relationship is covered by EU agreements, such as for information sharing, which become defunct and needs replacing by bilateral arrangements.

Regulation in a UK independent of the EU could become even more onerous. The swathes of regulation to hit retail financial services since the financial crisis have in many cases been invented in the UK and recycled into the EU law-making machinery, to be represented to the public as European law. It is no accident that since November 2007 the UK has notified the European Commission of more super-equivalence requirements under Article 4, Mifid I, than all of the other member states put together.

Firms might therefore want to relocate out of the UK. A few might do so entirely, but mostly this would be partially by shifting operational functions or merging to suit new constitutional requirements. Many would find the costs of total relocation too expensive.

So as with life, a Brexit would be good and bad in parts. The decision on whether to remain will depend on voters on 23 June, not an analysis of the wealth management sector, and David and Boris will have a lot more to do with which way they go than do we.

John Barrass is deputy chief executive at the Wealth Management Association