On 12 October 2017, Michel Barnier (the European Commission’s Brexit Chief Negotiator) and David Davis (the UK Secretary of State for Exiting the European Union) held a joint press conference after the fifth round of Brexit negotiations.
Both recognised that British Prime Minister Theresa May’s Florence speech on Friday 22 September had struck a more optimistic and pragmatic tone; however, it was acknowledged that more progress needs to be made concerning the three key aspects of the Phase 1 negotiations (Citizen’s Right, the Northern Ireland border, and the UK’s financial settlement) for progression to Phase 2.
Greater clarity is sought around the implications for the financial services sector, and with questions around what a transition period might actually entail, financial services firms are, on the whole, working towards a ‘most challenging scenario’ in their Brexit planning. Moreover, many firms have indicated that they would begin implementing their own contingency plans at the end of Q1 2018, if no further clarity is provided.
The immediate challenge for firms is to coordinate the vast amount of planning and logistics required to ensure they are ready for a range of ‘Day 1’ scenarios, and to ensure that their contingency plans are sufficiently flexible to adapt, as and when the full picture begins to emerge. In order to make a success of Brexit, there is now a very real need to move on from political rhetoric in order for firms’ plans to acquire significant depth and momentum.
Throughout the Brexit timeline, BNY Mellon has remained highly tuned to the challenges and considerations of our clients and peers. Being actively engaged in debates provides us with key insights1, which in turn enables us to better engage with our clients by identifying potential opportunities for their growth, and by supporting them with their own Brexit preparations.
- Investment Services and Fund passporting - from an investment management perspective, a key reality is the possible disruption of continued passporting rights into the single market once the UK breaks from the EU27. Firms are reassessing their existing licences, operating structures, product ranges and client bases, and are reaching individual conclusions about their future priorities. For example, a UK-based asset manager with 10-15% of revenues from European clients may have a different Brexit strategy than one more heavily dependent on EU27 business. This may apply whether the investment manager is relying on a passport to distribute funds or investment services under the MiFID regime, including portfolio management and investment advice. Thus far, there have been few investment managers to publicly declare their intention to set-up funds or licensed entities in a new domicile in preparation for Brexit, although we anticipate that many are making the relevant provisions within their operating framework to allow them to continue to successfully distribute product regardless of Brexit outcome.
- Timing - investment managers are following events closely, but cannot afford to await the outcome of political processes. In many respects, their watchful approach to Brexit is informed by their experience of compliance with post-crisis reforms of the past decade. Act too fast, and you run the risk (and cost) of adjusting to subsequent changes to policy and deadlines; act too slow, and you may end up at the back of the queue for the scarce resources, services and licences required to function effectively in the new environment. As a rule of thumb, any major change programme in a large investment management firm takes at least 12 months from initiation to completion. Should this hold true here, firms would have until Q1 2018 at the latest to put together the structure of their post-Brexit strategy, in the absence of a deal between EU and UK negotiators on a transition agreement.
- Talent - talent management is a challenge not to be underestimated. The Investment Management industry has a global workforce located in multiple financial centres across the EU. Moving ahead, recruitment and competition for talent in the UK and EU27 could be a critical issue, subject to how political negotiations conclude, as competition for key resources across a limited number of locations heats up.
- Delegation - from a portfolio management perspective, meanwhile, the high proportion of Assets Under Management (AUM) from European clients managed by portfolio managers sitting outside EU27 potentially poses systemic risks post-Brexit. Although the European Securities and Markets Authority (ESMA) has indicated existing delegation arrangements can continue post-Brexit, the extent of delegation permitted to individual firms is uncertain and may depend on the substance of firms’ operations within Europe. This is a key issue being discussed across the industry.
- Investor queries - returning to the theme of flexibility, we are only recently seeing a growing need for firms to answer specific questions and provide clients with fact-led reassurances as to their contingency plans and preparedness, in contractual discussions and RFPs. Ultimately, these are very likely to become a formal part of clients’ due diligence processes. Flexibility and preparedness, therefore, are fast becoming key selling points, particularly where the issue of post-Brexit regulations on investment vehicles throws into question the potential for new structures.
- Securities and derivatives clearing - investment managers will need to monitor developments closely to understand any change in trading costs or other adverse impacts of market fragmentation which will likely be ultimately borne by end investors, who thus far may not have considered such indirect costs. Key concerns here are transparency, diversity, risk fragmentation and pricing.
- Internal governance – a Brexit update is a regular agenda point and consumes the time of board and management committee meetings at Investment Managers.
Inevitably, investment managers’ Brexit strategies need to dovetail with other priorities: for example, MiFID II will come in to force in January 2018. But, as noted above, there could be risks in acting too late.
Whatever your own plans and priorities over the coming months, whether in regard to Brexit and/or change and growth in the widest sense, BNY Mellon is ready to lend our support and experience.
1 The insights outlined in this piece were raised by clients attending a recent round-table event hosted by BNY Mellon. The purpose of the event was to facilitate discussion of some of the key considerations currently facing participants in the financial services industry.