Growing consternation that the UK government is positing towards a hard Brexit is prompting UK-based asset managers with European investors to consider redeploying parts of their operations to Luxembourg and Ireland.
UCITS must be EU domiciled and controlled by an EU management company. Hard Brexit would therefore deprive these asset managers of the passporting rights afforded under UCITS. The same is true for UK fund managers using the pan-EU passport provided under the Alternative Investment Fund Managers Directive (AIFMD). Brexit has caused enormous excitement among the providers of third party management companies (“Mancos”) in Luxembourg and Ireland, many of whom are predicting a boom in business over the coming 24 months.
“A number of UK managers with EU investors will want to access the European market following Brexit and they are increasingly mindful that this will be a challenge after Brexit. As such, these firms are considering expanding their presence in jurisdictions such as Luxembourg to get an AIFMD or UCITS passport. We believe that Luxembourg will increasingly be used by UK asset managers as a gateway into the EU following Brexit,” said Claude Niedner, partner at Arendt & Medernach, speaking at the Association of the Luxembourg Fund Industry’s (ALFI) European Alternative Investment Funds Conference in Luxembourg.
A handful of UK firms have made the leap. M&G, the investment arm of Prudential, said in October 2016 that it intended to establish a presence in Luxembourg in order to retain access to its EU investors post-Brexit. Denise Voss, chairman of ALFI, acknowledged it was likely more UK firms would consider relocating if their single market access expired. “Brexit – at present – has no set deadline, unlike regulation where companies can work to a compliance deadline. This means firms have to think about how they will operate post-Brexit,” she added.
The uncertainty around Brexit is perhaps the biggest problem facing firms. In theory, Brexit negotiations cannot last more than two years once Article 50 of the Treaty of Lisbon is invoked, which could pave the way for cliff-edge negotiations. Financial institutions simply cannot take the risk of being unable to passport their services into the EU, and many are putting in place business continuity plans for Brexit. One fund manager said Brexit contingency planning was an increasingly common question from institutional investor due diligence professionals.
The reality is most firms are still sitting tight. Trying to predict Brexit’s outcome is not for the faint hearted, and some individuals caution that acting impulsively by relocating parts of their businesses to onshore EU could prove costly. Brexit does bear a passing resemblance to the panic that ensued following the first draft of AIFMD, which saw hedge funds transitioning into alternative UCITS back in 2009 and 2010, fearing they would be subject to arduous regulation if they were not UCITS compliant. AIFMD has since come and gone – and despite the compliance costs – it did not finish off the alternatives industry. UK managers should therefore be patient but prepared for any Brexit eventuality.