Several large asset managers have recently moved money out of the UK as more fund groups start making their Brexit contingency plans.
M&G Investments is preparing to transfer £34.2 billion of non-sterling share classes from Britain to Luxembourg, while Legal & General Investment Management has launched a Dublin entity to transfer its European client funds into.
Columbia Threadneedle also said it plans to shift as much as €7 billion (£6.14 billion) managed for EU clients out of its UK Oiec range to its Luxembourg Sicavs.
All firms have blamed uncertainty over Brexit negotiations as the main reason for the switch.
Away from the billions of pounds in client money already heading out the door, fund firms are also eyeing up the possibility of sending more staff to places like Dublin and Luxembourg, with the latter in particular emphasising the need for companies to strengthen the level of supervision.
According to data from LinkedIn, asset managers have almost halved the rate at which they are hiring in London, whereas there are now close to six times as many jobs posted in Luxembourg compared to before the EU referendum.
Despite the contingency plans firms are making in case of a hard Brexit – and with it the loss of Ucits passporting rights – London is still Europe’s financial capital. In April, the total number of investment management jobs posted on LinkedIn stood at 1,867 for London, compared to 339 in Paris and 278 in Luxembourg, according to the Financial Times.
US eyes on UK
As asset managers with a large UK presence look at how to service EU clients, similarly there are several, namely the big US groups, looking at setting up UK Oeic ranges to mirror their Sicav funds.
T Rowe Price launched the first 10 funds of its Oeic range throughout 2017 to mirror certain funds in its Sicav range.
A spokesperson for AllianceBernstein told Wealth Manager the firm is considering something similar, as it looks to continue servicing its UK clients, who currently access its products through the Sicav range, in case Brexit disrupts the current arrangement.
Ucits passporting rights will remain in place until the end of the Brexit transition period in 2021, but the UK will have to negotiate another agreement beyond that.
A top EU financial services official, Valdis Dombrovskis, told investment professionals in London last month that equivalence, where the EU unilaterally allows market access to finance firms from outside the bloc, as opposed to the current passporting system, will be a ‘probable’ outcome from the Brexit negotiations.
He was in London to discuss Brexit with chancellor Philip Hammond and governor of the Bank of England Mark Carney.
Stuart Alexander, co-founder and CEO of Gemini Investments, a business that helps firms launch funds, told Wealth Manager that several US and Asian fund managers are looking into having UK mirror funds in case Brexit negotiations turn sour and passporting rights disappear.
He said: ‘They are saying, “we need to be in European jurisdictions” and they recognise the need to have a Brexit strategy in case of a hard Brexit. They recognise the need to have that option to sell into the UK.’
Alexander added that Dublin and Luxembourg would also suffer in the event of a hard Brexit, due to the sizeable chunk of UK assets held there and the fact that firms would no longer be able to sell products into the UK.
But setting up a range of UK mirror funds can come with problems, the main one being cost.
To set up a new fund can cost about £20,000 but can go as high as £100,000 for an Oeic umbrella, plus the additional running costs. Multiply that by 10 or 20 funds and it can quickly become a very expensive task.
It is why setting up a range of mirror funds can often be something for the big boys only, who even then will have to merge smaller funds.
Alexander added: ‘That’s also why you are seeing consolidation in funds, because for some of the smaller funds the expense ratio is too high.’
Most firms in the City have hoped that some sort of passporting system would continue via a bespoke deal for financial services. However, the noises coming out of Brussels suggests it is increasingly unlikely such a deal will happen, with financial commentators now raising questions as to what will take its place.
But Alexander said he expects ‘common sense to prevail’ with an agreement reached where firms can still sell products into the UK and vice versa.
He said: ‘I’m a great believer that we’ll get diplomacy over these bully boy tactics.
‘Look at the US and China, despite Trump’s bluster both sides have called off this trade war as they’ve realised it’s not in their best interests.
‘It’s the same for the fund industry, it’s in neither side’s interest where one cannot trade with the other. It would be suicide.’