The ‘B’ word, Brexit, has presented the UK and EU with a largely unexpected and unprecedented conundrum. It has become a headache of frustration for the man on the street and a minefield of complicated implications for the
financial industry, which has had to consider everything from possible changes to regulation and where to register trade repositories post-Brexit.
Nigel Green, the founder and CEO of deVere Group, states: “The actual process of leaving the EU itself is now increasingly irrelevant. Indeed, even if the UK didn’t leave, unprecedented damage to the UK’s financial services industry has already been done.”
But how true is this? It’s fair to say that many never thought Brexit would happen, as reflected by the referendum results released back in June 2016, which indicated a borderline result of 51.9 percent favouring to leave.
So as the UK Prime Minister, Theresa May, ploughs on with her Brexit plan, it’s a question in the forefront of the industry’s minds—what will happen to the UK’s financial services?
Despite friction and negativity, many in the industry have said whatever the outcome of Brexit, London will continue to be a central hub for the financial world.
At this year’s Fund Marketing & Distribution Europe
Conference in London, held in February, one panellist affirmed: “London remains on the map. London remains the centre of excellence. There is an innovative and positive outlook for London, despite Brexit.”
Concerning portfolios, James Beaumont, head of advisory and consultants at Natixis Dynamic Solutions, says: “Within the UK, we have not seen investors making big changes to their portfolios ahead of Brexit.”
He adds: “If advisers are happy that they have built well-diversified portfolios then we would encourage them not to make any knee jerk reactions to Brexit”.
“There are so many possible outcomes, with so many ramifications, we would be very wary of trying to ‘trade Brexit’ and also wary of focusing so much on Brexit that you take your eye off other risks and threats that may actually have far greater consequences for a client’s portfolio.”
Don’t stop us now
But despite Brexit, the UK continues to be a competitive environment for asset servicing, according to Daron Pearce, CEO of Europe, the Middle East and Africa (EMEA) Asset Servicing at BNY Mellon.
He says: “While the UK market is a mature one, it remains dynamic as clients demand more effective and efficient processes while reducing the number of providers with whom they work. We continue to develop our capabilities in areas of growth for our clients, such as exchange-traded funds, private equity, real estate and loan funds.”
Also at the Fund Marketing & Distribution Europe Conference in London, a panellist discussing Brexit said she saw “no panics from distributors or end investors”.
She added: “There’s some hesitance to invest but not a lot. It’s largely business as usual.”
And at the ISITC conference in London earlier this year, a European Central Bank representative affirmed the bank’s aim to include and present everyone in collateral and corporate actions discussions after Brexit.
But unfortunately, across the board, the sentiment is not quite the same and there are fears from others that London could lose business.
PwC released a report last year that indicated the city of Frankfurt as the likely recipient of London’s relocated activity, particularly from Japanese and US banks, while Amsterdam was predicted to be the main location for trading venues.
PwC’s report reflects a more recent survey from Vistra which revealed only 35 percent of 800 industry respondents said they expect the UK to become more open to the industry and other international financial centres after Brexit.
Amidst all these possible movements, the European Securities and Markets Authority (ESMA) has been preparing for a no-deal or hard Brexit. At the beginning of March, the organisation said they would consider transactions concluded on UK trading venues as over-the-counter (OTC) transactions in the event of a no-deal.
Therefore, UK venues would be subject to the post-trade transparency requirements pursuant to Articles 20 and 21 of Markets in Financial Instruments Regulation.
This would be in the case of a no-deal where trading
venues established in the UK will no longer be considered EU trading venues.
ESMA noted this in a public statement, which provided opinions on third-country trading venues for the purpose of post-trade transparency and position limits as well as post-trade transparency for OTC transactions.
ESMA has also signed a deal with the Bank of England for the recognition of central counterparties (CCPs) in the event of a no-deal Brexit, which also recognises central securities depositories established in the UK.
Regulation ga ga
Steven Maijoor, chair of ESMA, has indicated a no-deal Brexit may have some significant effects of the second Markets in Financial Instruments Directive (MiFID II).
In his speech at the European Financial Forum 2019 in Dublin, Maijoor said: “I appreciate that some of the MiFID II thresholds may need recalibration in the new EU27 Environment.”
Maijoor had also explained that the MiFID II transparency framework is founded on a number of thresholds to be specified at ESMA level, to introduce a transparent regime for trading all types of asset classes on a level playing field in the EU.
He stated: “One specific example is the double volume cap, which limits the share of trading in dark pools and is meant to preserve the quality of the price discovery mechanism in EU markets.”
According to Maijoor, a no-deal Brexit will not only result in UK market participants losing their passports for accessing the EU, but there will be no further legal basis for the current extensive and granular daily data reporting from the UK to ESMA’s systems under MiFID II.
But while ESMA knuckles down to this various administration and consideration, there’s an indication that some European jurisdictions are making their own rules for a post-Brexit world.
A panellist at this year’s TSAM London, who is legal head of her company, revealed that most EU countries are taking it upon themselves to create agreements with the UK, or are creating domestic laws in preparation for a no-deal Brexit.
The panellist said countries that have put forward or are drafting domestic laws and/or agreements with the UK in the case of a no-deal Brexit include Sweden, Austria, Malta, Finland, Spain, Belgium and Luxembourg, among others.
She affirmed, of these countries, “all have Brexit decrees, all have, or are, drafting decrees—they are going out on their own for contingency plans”.
In addition, Guernsey’s financial services regulator has signed a memorandum of understanding (MoU) with the UK’s Financial Conduct Authority to ensure market access for Guernsey investment funds into the UK after Brexit.
The MoU will come into effect if EU law no longer applies in the UK, either through a no-deal Brexit or at the end of any transitional arrangements once the UK leaves the EU.
This will mean that Guernsey funds will still be able to be marketed into the UK.
But, as we all know, parliamentary matters are up still up in the air. At the time of writing, John Bercow, speaker of the House of Commons has ruled that Theresa May cannot bring
her deal back for a third vote without “substantial” changes. So could a general election or second referendum still be on the cards?
In March, at the Association of the Luxembourg Fund Industry (ALFI) European Asset Management Conference, 57 percent of the audience, who took part in an interactive poll, thought that a second referendum for Brexit is likely.
In the same poll, only 18 percent of the audience thought Brexit will likely go ahead as planned, while a further 10 percent suggested a delay of more than a year was likely.
At the same conference, Denise Voss, chairman of ALFI, discussed the future of Brexit with John Marshall, the British Ambassador to Luxembourg.
One delegate asked Marshall why the UK Government is not in favour of a second referendum and why it is looking unlikely it will take place.
Marshall affirmed: “There is a view shared by many that a second referendum would be a very divisive proposition.”
The show must go on
CitiBank says: “Our Brexit plans remained unchanged as we have prepared for a no-deal scenario from day one. It is still unclear what the exact terms of the UK’s exit will be but Citi has been planning for a scenario where the UK exits the EU without a definitive agreement or any type of transitional period.”
Pearce affirms: “The uncertainty surrounding Brexit is an ongoing consideration for BNY Mellon’s clients. As we await clarity on the UK’s terms of departure from the EU and the future relationship with the bloc, BNY Mellon continues to plan for a hard Brexit and ensure that we are able to provide continuity of service to our clients.”
He adds: “We are keeping our clients fully informed of our preparations, and where appropriate we signpost further publicly-available information related to Brexit preparedness.
For those of our clients who intend to continue marketing and selling funds post-Brexit, we have provided support by assisting with re-domiciling funds or launching new funds in order to guarantee future distribution, whatever the outcome of the Brexit negotiations.”
Sarj Panesar, global head of business development at Société Générale Securities Services, indicates: “As a group, we have been making detailed preparations in the case of a ‘hard Brexit’ and have been proactively communicating with our clients to reassure them that we can service them whatever the outcome may be but also to engage with them to help them with their planning and answer any questions.”
