Brexit: Now What?

Last Friday at 11:00 Greenwich Mean Time, after several years, hundreds of hours of political debate, and thousands of articles published on the topic, the UK officially left the EU. For some, this comes as a relief to those fatigued by the seemingly endless debate, but they might not want to pop champagne bottles just yet: we are far from the end of Brexit. In fact, Friday more accurately represents the end of the beginning.

What “Brexit Day” means to global asset managers in the long term also remains to be seen. That’s because for the next eleven months the UK will continue to follow EU rules on the same terms as it always has done. That will all change on January 1, 2021, when the official transition period ends. That is not to say managers should not yet again review their Brexit contingency plans, but it does allow more time before we reach yet another crucial Brexit deadline.

Leading up to January 1, 2021 there are a number of significant events that asset managers should follow. Some of these events are outlined in The EU Withdrawal Agreement which contains a 31-page Political Declaration, providing details for the next phase of negotiations on the future relationship.

The negotiations are expected to be extensive and complex. Most experts on such matters indicate that a comprehensive agreement is not possible by the end of 2020, rather agreement on the bare minimum required to avoid a no deal cliff edge in 2021 is a more reasonable goal. By way of comparison, recent EU trade agreements have taken six to 20 years to agree upon (Japan took six years (2012-2018), Canada took eight (2009-2017), and the South American trade bloc MERCOSUR took twenty (1999-2019).

What does it all mean for asset managers?

The negotiations will have direct impacts on asset managers based in the UK, in Europe, and across the globe as EU market access permissions and operational models of delegation are recast in a post-Brexit environment. The key asset management policy debate will continue to center on regulatory equivalence. 

The EU’s system of regulatory equivalence for financial services is one of the most used reciprocal financial market access programs in the world. There are about forty different third-country equivalence regimes in existing EU financial services legislation. Last July, the EU Commission restated their expectations about relationships with non-EU third-countries and the core principles which underpin regulatory equivalence, as well as a number of recommended enhancements aimed at improving the regime. The communication was a strong signal that the EU wishes to raise the bar on third-country equivalency assessments overall. So, while the UK and Brexit are front of mind, the developing equivalency regime impacts all non-EU countries in terms of reciprocal access to the EU market.  

The wider Brexit trade negotiations will likely indicate how far from the EU frameworks the UK wishes to diverge. For UK asset managers to be granted regulatory equivalence, the UK will need to remain closely aligned with EU regulations. However, one of the key drivers for Brexit was the ability for the UK to forge its own path free from the strictures of EU bureaucracy. Recently, the UK Chancellor for the Exchequer, Sajid Javid said the UK would use the power to diverge from the EU only when it was in the interests of business – a more conciliatory tone than that expressed by the government previously and one that might give UK asset managers hopes that equivalency is not beyond the realms of possibility. 

Also, in the UK, certain financial lobby groups have already begun highlighting the need for UK funds to foster new links beyond the EU should post-Brexit equivalence not be granted within the negotiations.  There is talk of the possibility of new fund structures that could target specific markets, such as Asia, and look to benefit from the new-found regulatory autonomy. However the success of such schemes is far from assured, and does not represent an immediate replacement to the UCITS and AIFMD markets which UK funds currently enjoy. 

One of the few Brexit certainties is that due to its unfinished nature, it will undoubtedly be a large focus of global asset managers once more throughout 2020.