What would no deal on Brexit mean for asset managers?

Given the level of interdependence that currently exists between the UK and the EU, the possibility of Brexit causing significant disruptions to smooth functioning of financial activities between the two jurisdictions cannot be ruled out.

About 41 per cent of all assets under management in the European Union are managed within the UK and over 75 per cent of all financial institutions in the EU are based in the UK indicating that that the other 27 EU countries are overwhelmingly reliant on the UK for experienced asset managers and other market practitioners, while the UK depends on the 27 member states for lucrative business opportunities and the job prospects that come with it.

In order to preserve these economic benefits, the UK is likely to relax its regulatory measures to allow EU27 member countries to continue with asset management and other related activities in the UK. Such regulatory measures could include tax incentives and lowering of capital adequacy thresholds for asset-managing entities operating from London.

This would safeguard the UK’s revenue inflow and job opportunities within its financial sector. Such regulatory measures could help to avert a mass exodus of experienced asset managers to alternative locations like Germany, Belgium or France.

In the event of a Brexit without a deal with the EU, the asset management market in the UK will lose a substantial proportion of its revenue source. In addition, this could result in massive job losses amongst finance practitioners and technicians in the UK.

One particular area, where Brexit is almost certain to trigger regulatory turmoil is where the EU will have to re-package and re-focus the European-wide legislative framework for regulating the operations of financial markets in the EU, Mifid II and Mifir, as well as its initiative under the Capital Markets Union.

The CMU is expected to take effect in 2019 and it is designed to ensure deeper and more integrated capital markets across Europe. These initiatives, which have barely began to make headway, have been severely weakened by Brexit. Europe is already taking steps to address this issue.

A comprehensive review of the CMU’s legal framework dominated the attention of European Commission’s Vice President, Valdis Dombrovskis, at the recently concluded Banking Congress in Berlin in April. If the Brexit negotiations result in no deal then the UK is likely to be isolated and it could lose its enviable position as the preferred centre of financial activities within the global arena.

In the event that the UK is forced to leave the EU with no deal, then the UK will pay a much heavier price as the 27 EU member states might be able to overcome temporary challenges associated with Brexit albeit in the long run, especially if they act decisively and collectively.

However, the UK would struggle to replace the EU markets that it currently controls, and the substantial revenues the market guarantees. The massive job losses, which the UK might suffer in addition, could equally dampen the prospect of economic growth in the country in the short run at least.

Dr Ola Sholarin is senior lecturer in economics and quantitative methods at the University of Westminster