Advisers face years, if not decades, of uncertainty in the event the UK decides to withdraw from the European Union. The impact of a “leave” vote is expected to have far-reaching implications spanning the breadth of UK financial services, including regulation, how funds are sold and ultimately for clients.
Now the date for the EU referendum has been set for 23 June, the battle lines are beginning to be drawn across the financial sector between those in favour of remaining in the EU and those who see the UK’s future outside it.
The financial services industry is just beginning to grapple with what a Brexit would involve. Much will depend on the model adopted in the wake of a UK vote to leave, ranging from maintaining a degree of involvement with Europe to a full divorce.
Pulling out of the EU would be far from “business as usual”. So what are the models on the table for the UK’s potentially new place in Europe? How would existing European regulations be affected? And what could the “leap into the dark” really look like in practice?
The Norway model
Following Prime Minister David Cameron’s package of reforms negotiated at the EU summit last month, talk has turned to the options facing the UK in the event of a Brexit. One of the often quoted models is a Norwegian-style agreement, under which the UK is part of the European Economic Area but still has to adopt EU rules and regulations. Under this model the UK has little influence over what the rules are.
Fund administration firm Brown Brother Harriman senior vice-president Sean Tuffy says: “It really depends on how acrimonious the split is between the EU and the UK. If there is a Brexit vote and the UK goes to the Norwegian model there will probably be little change. If the split is less friendly and the UK ends up out in the cold from an EU perspective that could have much larger ramifications on how firms access EU markets and the structure of funds businesses.
“There is no precedent for a country leaving Europe so there is no blueprint for how it will work. There will be extraordinary uncertainty, and it could well take years to leave.”
“If the UK goes the Norway route it will have to implement European rules regardless. If it exits completely, then at that point it is no different to New York, where they don’t have Mifid rules. That could have a pretty big impact on investment activity.”
Investment Association interim chief executive Guy Sears says: “Our analysis concludes should there be a full UK Brexit that resulted in the UK having third-country status, then it would be profoundly disruptive for the export of asset management services and products, as well as potentially having consequences in other areas, such as access to market infrastructure.
“Leaving in such circumstances, coupled with the likely loss of influence over the rules with which we would have to show equivalence to continue to operate within the EU, would not be a desirable outcome for our sector. Clearly, however, there are alternative models which might reduce this impact and, for that reason, it is extremely difficult to predict precisely the longer-term consequences for the asset management sector.”
Brace for regulatory impact
Some commentators argue as the FCA and the Prudential Regulation Authority has taken the lead on financial services regulation such as the RDR compared with their European counterparts, nothing much will change in the event the UK votes to leave the EU. But not everyone is convinced.
Pinsent Masons head of strategic development for pensions Robin Ellison says: “On investments it’s a mixed blessing – the good news is a lot of the EU regulations will not apply. The bad news is more complicated British ones will have to be introduced at some stage. It will be just as complex, but a different kind of complexity.”
Ellison says pensions have been subject to many European Court of Justice rulings in recent years, and it is unclear how a Brexit would impact existing decisions.
He says: “It will be a mess in the interim because of the way case law in Europe works. It will not be clear how long existing decisions will last for and whether rules still apply and how long for. There will be uncertainty for 10 to 15 years while they work it out. The dream of England on its own leading to simplified regulation is just a fantasy.”
Wealth Management Association deputy chief executive John Barrass says: “Brexit would not mean there will be less or easier regulation. In the EU regulatory framework for financial services, a lot of the pressure for the rules we have has come from the UK. The FSA and the FCA have led on EU legislation on conflicts of interest, commission, definitions of independence and product governance. People should be realistic about this. If people vote out, they won’t get less regulation but they may get more finely tuned regulation.”
Barrass warns about any move to unpick European regulation already in train, such as Mifid II and Priips. Even if the UK leaves, there still may be “equivalence tests” to show UK financial services regulation is in keeping with rules coming from the European Commission. He adds: “If anything changed with those regulations we would need to have something that is equal to or stronger than the EU arrangement. But even if we do vote to leave there will be a two-year limbo period during which the UK would prepare to leave, and nothing much would happen.”
“We don’t know what the new system is going to look like, and the transition could be very difficult.”
Another issue that has been identified is what happens to the Ucits passport currently available for funds marketed in the EU. The passport allows fund managers in member states to take funds domiciled within the EU and market them either in their own country or other member states. Under a Brexit, that cross-border access would cease.
Barrass says: “There will be rearrangements within businesses so they have parts of their business within the EU to do the passporting. For big multi-national firms this won’t necessarily be a big problem.
“But if you are a single office company in the UK, you will need to set up a new establishment [in the EU] and re-register, so there will be costs there. It all depends on how the firm is set up and structured.”
He says the passporting issue will also hit clients, and by extension, advisers. “Firms will not be able to passport to service clients who decide to retire abroad, for example. The issue of managing clients’ portfolios in the EU from the UK will become more complicated because they won’t be able to access them direct. You would have to get re-registered and reauthorised by the regulator of the country the client has moved to, and that will almost certainly involve setting up an establishment in that country.
“A small wealth manager in the UK will all of a sudden be faced with the cost of setting up in another EU country. Will they do that or will they be forced to abandon the client? The reality is we don’t know.”
Analysis by BlackRock on the impact of Brexit suggests UK-based Ucits funds might have to move their jurisdiction to a country within the European Economic Area, which would mean outside the UK if the decision is made for full-blown separation. The firm says this would likely generate a taxable event for investors.
JP Morgan EMEA and Europe chief market strategist Stephanie Flanders argues in the longer term a UK exit from the EU would not detract from the success of the UK economy.
But she says: “We don’t know what the new system is going to look like, and the transition could be very difficult. I am less concerned about big market moves and the sterling than I am about the individual companies that we are invested in. How skilled do we think they are in navigating that new environment?”
The details of how a Brexit would come to pass are still being worked out but it is clear a UK on its own would have significant implications for financial services.
Old Mutual Global Investors chief executive Richard Buxton says: “There is no precedent for a country leaving Europe so there is no blueprint for how it will work. There will be extraordinary uncertainty, and it could well take years to leave.”
23 June: Date set for EU referendum
£58bn: Amount of assets managed by the UK for European clients that have access to a Ucits passport. Under Brexit, the passport would be lost
2-7%: Estimated reduction in GDP over the next 15 years in the event of a Brexit
Source: Investment Association, Axa Investment Management, JP Morgan