Steven Maijoor of the European Securities and Markets Authority hopes the EU and UK will have memoranda of understanding that will avoid disruption in the financial sector prior to Brexit. Pictured: Steven Maijoor speaks at the Alfi European Asset Management Conference, 6 March 2018. Image credit: LaLa La Photo
If the UK parliament does eventually agree to adopt a Brexit transition deal, it appears likely that approval will come shortly before the 29 March 2019 deadline. Maybe even afterwards. Yet even if no deal is passed, the financial services industry is unlikely to face a “cliff edge”.
With many UK parliamentarians believing brinkmanship is required to force the EU27 to change the proposed Brexit withdrawal agreement, the decision in the UK parliament is likely to go to the wire. As well, many observers believe more time will be required to pass substantial quantities of enabling legislation. Thus an extension to the UK’s departure date looks likely: be it days, weeks or months.
EU regulators are working to remove uncertainty where possible, setting out a series of contingency plans in the case of “no deal”. The fundamental strategy is that as little as possible should change over the short term, and this applies to the full range of financial services, including the funds industry. Last 3 October, Steven Maijoor, chair of the European Supervisory and Markets Authority, spoke of “the objective to have...MOUs [memoranda of understanding] in place sufficiently on time before the end of March 2019”.
This includes rules for the delegation of asset management to third country asset managers under Ucits, AIFMD and Mifid. However, this does not mean that UK funds that wish to continue to be sold across the European mainland can do without changes to their distribution arrangements. They will be viewed as being from a third country, like funds from the US and Switzerland. Thus UK asset managers will need a base with sufficient “substance” in at least one EU member state.
As far as Luxembourg is concerned, this has mainly seen the arrival of funds and insurance companies. In early February 2019, Nicolas Mackel, CEO of the Luxembourg for Finance trade promotion body, estimated that anything from 75 to 90 UK financial services businesses will have moved operations to the Grand Duchy by the end of 2019. He predicted a total 3,000 new jobs will have been created here as part of the Brexit process since mid-2016.
Thus whether the UK agrees or not the transition arrangements outlined in the withdrawal agreement, a landing zone has been defined that looks much like existing arrangements. As well as financial regulation, other steps have been taken to minimise disruption for businesses. For example, there are plans to keep passenger flights operational flying into and out of the UK.
When the dust settles and the transition arrangements become clear, talks will then move to defining the future relationship between the UK and the EU. The signs are that the EU decision makers will move cautiously as they are unwilling to risk causing economic damage. Most likely for asset management, the UK will continue to be treated like the US, Switzerland and others. However, this would probably need to change if the UK government decides in the future not to abide by relevant EU regulations.
Yet over the longer term, EU voters will want regulators to exercise sufficient control over certain financial sector functions and this could see more business having to move from the City of London. Euro clearing is often cited as an activity which will probably need to move, but other areas could be affected.