“In the business world, the rear-view mirror is always clearer than the windshield.” – Warren Buffet.
Much has been said about the potential impact of Brexit on the various sectors of the UK economy, from banking to insurance as well as the asset management world. What are the impacts? And are there potential solutions for asset management companies?
From an economic point of view, the impact of Brexit in the medium to longer term will be the ability of the UK to be able to access the single market, the retention and/or attraction of talent within its shores as well as factors such as inflation, interest rates and wage demand pressures. The strength of the Sterling during the initial post Brexit turmoil come March, 2019 will also have a significant impact.
The consequences of Brexit for asset management companies could be momentous. Significant cross border business takes place between the UK and EU, through the use of the “passport”. The key passports being those under the UCITS and AIFM Directive as well as the MIFID II passport.
In addition to the aforementioned, managers are likely to suffer much more than the loss of the passports. Managers will need to navigate the ability to delegate the management of EU funds and if no agreement is in place – what will happen? Will new co-operation agreements with other EU regulators be entered into? Whilst this would be a possible outcome, it may potentially be a long and winding road. An arduous task, as negotiations could potentially not take place against a bloc of regulators, but on a one to one basis with the different regulatory bodies spread across the EU.
Equivalence is also another matter which would need to be considered. What is today being considered as a financial instrument in both the UK and EU may no longer apply post Brexit. The same may be said in relation to regulated markets. A whole raft of other laws would need to be considered, without considering the impact on the application of GDPR.
Brexit status of negotiations
Whilst initially many industry players advocated that they needed more clarity in relation to the potential outcome(s) of negotiations between the UK and the EU before taking and making a strategic decision; many asset managers are extremely frustrated with the lack of impetus and urgency being (or perceived to being) communicated through the words, actions and body languages of politicians.
As days turned into weeks and weeks into months, two years down the line we are none the wiser on what the final outcome of Brexit negotiations will be. With all sectors being in limbo and not knowing the final outcome (will we ever?), the reality of a hard or no deal Brexit is hitting home.
It has been reported that 59% of asset managers are preparing for a hard Brexit. Many have set the ball in motion and have hit the proverbial red button and commenced the implementation of their contingency plans. Nonetheless, there are some asset managers which are leaving the decision-making process to go down right down to the wire. They believe that the best interests of their clients’ can only be served if they give them all options for as long as possible.
In the event (likely or maybe not?) that UK asset management companies are not considered to form part of the single market, such firms would need to consider having an EU operation to be able to continue serving their EU based clients. This comes at a significant cost since as noted by ESMA in March of this year, letter box entities will not be tolerated and that sufficient substance must be proven when establishing a new operation in any one of the EU Member States.
The obvious choices for many of the larger firms are Dublin and Luxembourg. Yet, Malta as an EU Member State, member of the Eurozone as well as implementor for EU laws and regulations should not be forgotten.
Being one of the youngest EU Member states, Malta’s financial services industry has grown year on year and has attracted asset managers, funds, banks and other institutions to the island. The Maltese legal system is a mix of continental as well as British laws with various laws having been modelled on the British model, in particular in relation to company law, taxation and maritime law. Malta has also adopted EU Directives & Regulations.
Malta’s affinity with the UK, the similarity in terms of laws and the ability to re-domicile operations both into and out of Malta (applies to both funds and asset management companies) gives asset managers the possibility of continuing their operations in a seamless fashion within a professional environment. Malta’s corporate tax regime (with over 70 Double Tax Treaties), and incentives for high earning qualified individuals, quality of life, cost-effective and professional financial services industry, ideally positions it as a jurisdiction from where business can be done. The ability to speak with the Malta Financial Services Authority (MFSA), who is modernising the way it regulates and serves the needs of the industry to reduce bureaucracy and extensive range of legal and accounting services, will position the island as an ideal jurisdiction for asset managers to set up and continue managing their EU based funds and have access to the EU single market.
About the Author
This article has been authored by Nicholas Warren – Senior Manager Financial Services and Blockchain. He holds over 16 years of consultancy experience to international clients on the various possibilities presented by Malta as a Financial Services Centre.
For more information please do not hesitate to contact our Financial Services Team at [email protected] or +356 2557 2557.