21 Mar 2023
Post-Brexit relocation: Opportunities and challenges for fund managers
Brexit caused many UK fund managers to head to Europe, but with the UK government now taking active steps to support domestic financial services, a two-way trend of relocations looks set to continue.
Two years on from the UK’s exit from the European Union, we are yet to see any meaningful progress towards equivalency that might allow UK funds to distribute into Europe.
As a result, UK managers and service providers have struggled to maintain their European distribution lines and have been forced to either establish or beef up their presence on the continent. More than 440 financial services firms had moved part of their business, staff, assets or legal entities from the UK to the EU by April 2021, according to analysis by think-tank New Financial.
The report identified more than £900 billion in bank assets (roughly 10% of the entire UK banking system) that had either moved or was being moved at that point, while insurance firms and asset managers had also transferred more than £100 billion in assets and funds. Those shifts have continued as Brexit has bedded down.
Meanwhile, we have seen growing interest among continental funds in building their presence in the UK, spurred by the government’s commitment to supporting the financial services sector, and its pioneering approach to digitalisation.
Funds considering a location must weigh a variety of factors. Chief among these is the location of their target customers, but they must also determine the cost implications, the regulatory differences, and the willingness of their existing clientele to accept the move.
Fund relocations post-Brexit
While the biggest managers typically already had a funds presence in Europe for a variety of reasons – including a preference among Asian regulators for Luxembourg funds, for example – many of the mid-tier UK firms struggled to adapt.
In recent years, some have opted to move UK clients back into UK entities, while others have committed to establish more substantial presences in EU member countries, primarily in Dublin and Luxembourg.
At the same time, we have seen a shift in regulatory approach, and where management companies had previously been permitted to be light on the ground in terms of staffing in those offshore European locations, the Central Bank of Ireland (CBI) in particular has recently been strict in insisting on a meaningful presence.
Like the Luxembourg authorities, the CBI has seized the opportunity to create employment locally and decreed that new offices must be staffed by experienced risk and compliance professionals, adding cost and requiring asset managers to run duplicate operations in the UK and Europe.
While much attention has focused on the outbound movement of UK financial services firms to the EU, many service providers have found UK clients keen to return to the UK from a funds perspective. We have observed a growing number of transfers from wealth management clients that used to be UK distributing funds in Irish fund ranges bringing those back to the UK.
Likewise, an increasing number of European managers are keen to take advantage of opportunities in the UK market, such that relocations are now taking place in both directions. While Dublin and Luxembourg have been the principal beneficiaries of these trends from an employment point of view, many decisions remain motivated by governance considerations.
The UK regulatory framework is still recognised as the gold standard in terms of oversight and funds governance, with a strong population of experienced regulatory advisers and professionals, and we are seeing demand from managers seeking support with bringing investors to the UK from offshore.
The UK’s attractions
In the wake of Brexit, the UK government has made clear its intentions to support the domestic financial services industry, attract funds into the UK economy and create growth.
In December, the Chancellor of the Exchequer, Jeremy Hunt, travelled to Scotland to unveil a package of reforms to the UK’s financial services regulation, dubbed the Edinburgh Reforms. These are aimed at creating an agile and home-grown regime, tailored to the UK market and capable of attracting newcomers.
The government has created the new Long-Term Asset Fund (LTAF), a new type of FCA-authorised open-ended fund that can invest in mainly long-term, illiquid assets and has the benefit of being able to bring in capital. While we have yet to see the launch of any LTAFs, we do see a flurry of asset managers showing a keen interest in that new structure.
The UK government has also highlighted its appetite to encourage digital innovation by creating legislation supportive of cryptocurrencies and digital assets. That is inevitably the direction of travel for this industry and the UK is working to modernise its regulatory landscape to be more agile and alive to those opportunities.
Making jurisdictional choices
For funds reconsidering their geographical footprint, the most important aspect must always be where a firm’s clients are based and where they are targeting growth.
If continental Europe is the priority, then a manager is going to need a European fund range, whether that is in Ireland, Luxembourg, the Netherlands, Germany or elsewhere. With the regime as it is now, and passporting no longer an option, UK managers selling UK funds into Europe require approval in each country, which is both costly and complex.
Similarly, managers looking to the UK market need to think about their target clients. The UK is a huge institutional market, with more than 80 local authority pension funds, for example, so it has always been ripe for managers to sell to institutions.
At the same time, the UK retail sector is growing rapidly and thriving, helped by digitalisation that now allows managers to connect directly with investors and is upending the established platform market. The larger UK wealth managers have enjoyed strong growth even in the down market, partly as a result of the country’s position as a digital enabler and forerunner.
Tapping that UK opportunity is attractive to overseas managers but does not come without its challenges. New arrivals need to work with experienced advisers to navigate the complexities of UK corporate governance as it applies to fund ranges and fiduciary management.
Before taking steps towards relocation, managers need to build a clear understanding of the costs involved, as there are hidden costs that can easily be overlooked. There could be a change in beneficial ownership triggered by moving location, for example, so identifying the optimum structure to move forward on a cost-effective basis is important.
Staffing can become an issue for managers leaving the UK for jurisdictions with less established advisory communities, but is typically less of a challenge for those coming to the UK from elsewhere.
Finally, managers must be careful to make sure they have clients on board with any decision. It is usual to require a vote from clients before proceeding, so it is always advisable to have those conversations earlier rather than later.
Identifying the optimal post-Brexit structure is not easy and varies enormously from one institution to another. While both European and UK authorities continue to make positive noises about some sort of trade agreement that might create equivalency for funds, we have seen little progress so far.
For now, it is a case of ‘plus ça change’. Anyone in the UK seeking to sell into European markets will need a European presence, and vice versa.
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