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As UK prime minister Theresa May begins the two-year process of negotiations with her EU counterparts, the country’s financial services sector is bracing for fundamental changes to its relationship with its biggest overseas market.
David Suetens, managing director of State Street in Luxembourg, said it could prove difficult post-Brexit to sell funds domiciled in Luxembourg or Ireland into the UK if fund passporting rules are affected. However, the global appeal of these funds could mitigate this effect, he said.
“Luxembourg and Irish funds are for the most part cross-border products recognised and distributed worldwide,” Suetens said. “Even if the passport were lost, regulations will nevertheless still be aligned, which should allow for sale into the UK as is already the case in other non-EU states. Luxembourg funds are registered for distribution in 70 countries worldwide.”
For EU investors in UK funds, Suetens said there could be “some re-shuffling of products and investors”.
“Promoters will most likely re-direct EU investors to EU-based vehicles and keep OIECs [UK investment vehicles] as local distribution products,” he said. “This said, to the extent regulatory frameworks for funds remain comparatively equivalent between the UK and the EU, and consumers are still allowed to purchase cross border… the choice ultimately will still reside with the investor who will ultimately set the course.”
Julian Korek, global head of compliance and regulatory consulting at Duff & Phelps, said the success of EU fund domiciles such as Luxembourg and Ireland meant there was “no real need for managers to move wholesale operations abroad” from the UK.
However, Diala Minott, corporate finance partner at law firm Paul Hastings, said some asset managers still faced the task of convincing important staff to move away from London.
“We have seen some regulatory arbitrage occurring in the industry with managers worrying about how they will convince their best talent to move way from London,” she said. “In most cases, the decision will come down to personal preferences as well as what historical infrastructure asset managers have in certain European jurisdictions.”