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Now that the two-year countdown to Brexit has started, asset managers and asset servicing firms should be planning for life after the UK departs the European Union.
Given the uncertainty about the outcome of the Brexit process, all firms need to be planning around a wide range of scenarios. They should be prioritising actions to ensure they will be able to access clients and markets after the negotiation period ends.
In many ways, Brexit is a challenge and an opportunity for Ireland. Ireland exports more to the UK than any other EU country. Ireland will be the only English-speaking gateway to Europe after Brexit. Ireland will continue to offer uninterrupted access to the EU market of 450 million people.
Ireland's exports include the sale into the UK of UCITS and AIFs domiciled in Ireland or in other EU countries and serviced in Ireland. Often, management of the assets in these funds are conducted by investment professionals based in the UK. They are keen to ensure that they will be able to manage these assets after Brexit.
Ireland has a strong, established Asset Management industry. It features a strong pool of talent with deep knowledge and experience of working with asset managers and investors across the globe. Additionally, there is a large pipeline of new talent graduating from universities and third level colleges each year.
Key issues facing the sector include:
The number one issue for asset managers is access to clients, whether on a segregated mandate basis or via UCITS and AIFs. For UK based asset managers using funds which are domiciled outside of the UK for European distribution, a major concern is whether these funds can continue to delegate the investment management of these funds back to the UK after Brexit.
Given London’s position as Europe’s most important financial centre, it is not surprising that a large number of firms have their MiFID hub in the UK, with representatives and branches located across Europe.
After Brexit, the question of whether a UK-based MiFID hub can continue to serve European clients as it did before is a concern for a significant number of asset management firms. Many firms are looking at alternative options including management companies or MiFID firms in Ireland.
Serving the large UK investment market is a consideration for many managers who currently passport non-UK domiciled funds into the UK. Following Brexit, managers who wish to continue to sell non-UK funds to retail investors in the UK will need to apply to the FCA for the fund to become a Recognised Fund.
When asset managers and asset servicers look at Brexit, they see extra costs. They expect these to arise from the extra licences and legal entities which they will need to enable them to continue to serve their clients.
Firms will be making a mistake if they only look at this question through a regulatory lens. One of the aims of the OECD’s BEPS project is to realign taxation with economic substance and value creation, while preventing double taxation. Firms making decisions about operating model design (including locations, entities etc) following Brexit will need to ensure they consider the implications of BEPS and transfer pricing.
The asset management businesses located in London are there for two main reasons. The availability of talent, and the fact that the UK is large market for retail and institutional investment.
According to the Investment Association’s 2016 Annual Survey, asset management firms believe that the long-term impact of Brexit will be judged by the future location of new capacity in Europe as much as the potential relocation of existing personnel.
Based on projects we have been involved with to date, it is evident that the availability of key talent is one of the primary criteria that firms are using to decide where they should relocate to retain access to the EU single market. Firms should be assessing the potential challenges that Brexit raises for the retention of their key talent before it’s too late.
If you have not started to consider what life after Brexit will look like for your business, the following questions will help you:
PwC has a multi-disciplinary team that draws on subject matter experts in regulation, tax, Transfer Pricing, recruitment and consulting. We can work with you to plan and put in place your Brexit strategy.
If you would like to discuss any of the points raised in this article, and the effect of Brexit on your business, please contact us.