The phrase, “a week is a long time in politics” coined by former British Prime Minister Harold Wilson has never seemed as relevant as it does today. The UK voted to leave the European Union, David Cameron stepped down as Prime Minister and the England football team also no longer felt the need to be in the European Championship, although most would have predicted this early exit. A Brexit, on the other hand, we did not.
So where do we go from here and what have been the initial reactions from the market? Are we at the beginning of a new dawn, a prosperous era for our country where we forge our own new path, or is this the beginning of the end? A long, turgid drawn out break-up full of acrimony and hate? The level of uncertainty created is palpable, as banks scramble to speak with their respected law firm contacts and consider potential contingency plans that have been outlined over the last few months, assessing their viability. Those in our regulatory lawyer network in particular have been under significant pressure in discussing and advising on the issues that this has created.
Across our compliance network, it has been noted that Brexit has added an additional variable to anyone considering their next opportunity. Career development, salary, scope and breadth of role are all of high importance throughout the due diligence process of your next employer, but now a bank’s strategy to relocate to avoid passporting issues needs to be considered. We’ve heard rumblings of Frankfurt or Dublin, which isn’t going to be viable for everyone, and institutions still feel the pressure of the FCA to deliver on the current pre-Brexit hiring strategies as a move of any kind is still a few years in the making. There has been much speculation in the press about banks’ contingency plans, relocating outside of the UK to a European hub, with HSBC moving 1,000 heads to Paris as one example. Clifford Chance comment that this is looking at the worst case scenario, and perhaps somewhat conveniently, it takes two years for a bank to plan and implement a change in operations whether it is nearshoring or offshoring. To put a finger on a single preferred location is a difficult question. Simmons & Simmons noted that there is not one European regulator which could handle the sudden influx of new registrations, moving away from a central European hub for banks.
We have previously discussed in an earlier blog, which considered the implications of Brexit, how our time zone, language, sophisticated legal system and high calibre workforce has allowed our country to flourish and be a dominant force in global banking. Last Friday’s result has not changed this and it should be for those same reasons that our economy, whilst may stagnate in the short term as expected, has the tools to capitalise on this new world and flourish. This is to be supported by the role of experienced, highly skilled compliance officers, who now more than ever have the ability to provide the bank with assurance and calmness to provide the most pertinent and recent advice.
Taking a view from an asset management and funds perspective, there are quite a few points which we can speculate on; however, much is still to be decided in light of the deal which will be struck between the UK and the EU. Hedge funds however are largely unconcerned with the move as their position will remain under the guideline of AIFMD, due to their status remaining as AIFs, even in their new standing as a third party to the rest of Europe. Hedge funds, in typical fashion, went around lacing their palms in the days running up to the vote. According to Marshall Wallace, Odey & TT international shorting UK stocks, the consensus from their side of the fence has been fairly consistent, with many hedge funds being strong advocates of the leave camp through the build-up. One commentator from a leading trade association commented that “the nature of their business is largely London, NY & Hong Kong, the rest doesn’t always matter”. Hedge funds will therefore look to capitalise on any situation and work with the position they gain.
With the major listed asset managers conversely, their struggle has already started to hit home. At what was already a difficult time for the asset management industry, with profits being squeezed and significant outflows, after the vote there were a number of redemptions whilst also taking a massive hit in share price. Looking ahead, another challenge we envision is whether the EU will recognise the UK in terms of equivalence. If not, passporting along with marketing, could potentially be a logistical problem and, in turn, the UK UCITS funds could be viewed as AIF’s to their EU investors. Luxembourg or Dublin would act as possible homes for many of these organisations, with M&G already looking at Dublin as their new centre. A lot of this will also come down to the FCA and how far they’re willing to go in keeping to EU laws. If they differ or become more lenient on certain laws after article 50 then equivalence could present a problem. It seems likely for a BAU situation and EU Regulation to still apply to the UK for the foreseeable future.
Much was made in the build up to the referendum, with plenty of “fearmongering” from both sides. We now must recognise that the only way to really make a positive outcome is to collaborate and pool our resources to continue to make sure the UK remains a financial & professional services global powerhouse. There will undoubtedly be regulatory challenges and we have already experienced a slower market from a transactional perspective. However, there will be opportunities to capitalise on from a legal and compliance outlook, once the relationship between the UK, the EU and beyond becomes clearer.