Brexit and passporting of funds
25 October 2016
While the debate of a parliamentary vote on the Brexit referendum result is currently making its way through the High Court, as UK based investors, we should also consider what impact there may be for us depending on the severity of the final Brexit deal agreed.
Currently, financial services passporting is used within the European Economic Area (EEA) to allow a financial sector firm in one EU country to provide products and services in another without needing to go through any further regulatory or trade tariffs, provided it is regulated and licensed within its home country. By allowing firms to offer their services across constituent EU country borders, this in theory allows greater competition and choice of investors across Europe.
It is unclear what level of access the UK will keep within the EEA and hence whether passporting will still apply. A ‘hard’ Brexit will likely mean no passporting rights, while a ‘soft’ Brexit may mean some bilateral agreements could allow UK firms to market their funds in the EU, and vice-versa for EU manager to provide funds in the UK. Given the globalised nature of many financial firms, should the lack of passporting require an overly burdensome requirement on firm headquartered in the UK (eg the requirement to setup subsidiaries in the EU), we may well see some firms moving an increasing amount of roles into the EU and the City losing its dominant international role. Anecdotally, from my own conversations with fund manager firms in London prior to the Brexit vote, given the high cost of office space, creaky infrastructure and more attractive tax regimes elsewhere, meant that a fall outside of the EEA could tip the balance in favour of moving more operations out around the EU, in particular to Dublin (where the overwhelming majority of EU-based exchange traded funds (ETFs) are domiciled currently).
However, while this sounds very dramatic, what does this mean in a practical sense for the UK based investor? Very likely there will be no obvious change, especially in the short-term. The City has been a leader in financial services since the big-bang deregulation reform in the 1980s and consequently has had a large input into regulations formed within the UK and EU. This means that, unlike Switzerland, financial services in the UK are already in full compliance with EU law, even if they were to lose passporting rights.
Considering the long-term, even if many firms were to move their headquarters to another EU country, it is very unlikely that the funds and services they offer would be not made available within the UK, given the size of the UK economy (assuming it doesn’t shrink much after Brexit!) and relatively deregulated and sophisticated level of the UK financial services market, for example the demand for retirement solutions following pension freedom reforms.
So while we can stress about what Brexit means for the UK economy and if we’ll be richer or poorer, we can be confident that for whatever savings we have left, there will be financial firms offering their services to conveniently invest the money on our behalf, just as it is now!