BBH quashes custodian Brexit panic; plans on increasing UK staff

BBH's associate general counsel says Brexit has been relatively easy for custodians, and that the firm could look to add numbers in the UK.

By Jonathan Watkins

Custodian Brown Brothers Harriman is looking at adding UK staff in preparation for Brexit, according to one of its general counsels.

Discussing the impact of Britain’s impending withdrawal from the European Union, John Siena, associate general counsel at BBH, said it is more of a client issue than a custodian problem.

“It’s been relatively easy for post-trade providers like custodians,” said Siena at the AFME Post-Trade conference in London.

“The things that asset managers are struggling with might lead to asset migration or to Luxembourg or Ireland, we’re already there anyway. For us the book is just growing.

“It forces us to look at the UK and how we are supporting it if you are looking at fragmentation and distribution levels. My shop would actually have to think about how we are increasing staff in the UK.”

Siena further emphasised how custodians aren’t worrying too much about Brexit by highlighting how the European Association of Global Custodians – combining the 12 largest players – isn’t even on the agenda.

“We struggle on that committee with whether we should even put Brexit on the agenda. We have other priorities at the moment, CSDR, shareholders rights, aspects of MiFID II, while UCITS and AIFMD still continue, those are the fires still burning in front of us.”

“There just isn’t meat to sink your teeth into when it comes to Brexit.”

On the same panel discussion, representatives from asset managers voiced concerns about potential delegation rules around portfolio and risk management which are threatening the UK’s fund management industry.

“The global delegation model as we know it on the buy-side is under threat,” said Dr Sabine Dittrich, global head of regulatory intelligence, UBS Asset Management. “It is not a major topic on the sell-side but it is on the buy-side.”

“We believe it was a key component of the success of UCITs and AIFs in the world that we were able to leverage experience of global portfolio managers.

“Not only in the UK, it’s also a question of portfolio managers in Switzerland, the US, HK. Any restriction that makes it less certain and more bulky to set things up etc is endangering the axis of investors to that pool of talent.”

Brexit poses a risk to the ability of the buy-side to delegate management of European funds to UK managers, something which has drawn widespread criticism from industry participants.

Some firms are also becoming deeply flustered about whether ESMA will introduce limitations on delegation and reverse solicitation as part of its review into the AIFMD, a possibility which could force firms to increase their substance inside the EU at great cost.

Steven Maijoor, chair at ESMA, speaking in March 2018, sought to assure the industry that the regulator was not looking to undermine the delegation model, but rather counteract the risk of letterbox entities developing in some markets.

“A danger to delegation is huge, but considering the amount of portfolio management that takes place in the UK, it would be so significant if they need to lift their portfolio managers and move them to these places where they have already been bringing in extra staff for investment risk and that sort of thing,” said Kyra Brown, senior public affairs manager, Aberdeen Standard Investments. “That’s a complete game changer.”

Global Custodian wrote in April that UK asset managers have been warned that they should file their regulatory authorisation applications with the relevant EU bodies no later than the middle of 2018 if they want to passport into the Single Market once Brexit completes. 

The notice was issued by European regulators as they acknowledged that there could be delays to authorisation approvals if submissions are left until late in the day by managers, something which could see UK firms denied access to their EU clients.           

Dittrich added that it is difficult to prepare given the uncertainty but is concerned the industry is moving towards a cliff edge without equivalence in place, given that the two markets will need to be untangled.

“The closer we get to year-end and no agreement has been signed and there are problems everyone will get so nervous, including clients,” she said.

“The asset management industry has pension funds as clients, for example, and they have specific rules about how their assets are managed, some other clients might want their assets managed in the EU under this regime or want to stay in the UK, but how does that change their relationship if they stay in the UK and how does it change servicing.

“As Swiss HQ firm, the discussion is also impacting the Swiss and UK relationship in the same way it impacts the US and UK relationship as they are currently governed by the EU equivalence. None of it is automatically transferable to the UK in the event of Brexit.”