The financial services, and more particularly the asset management industry, are probably one of the sectors the most exposed to the consequences of a Brexit.
Before the referendum, fund sales in the UK had already been affected by uncertainty. According to Lipper, assets in the UK’s fund industry had fallen by nearly £200bn to £900bn during the past year. The City of London is the European headquarters of many of the world’s biggest asset managers, with an estimated $6.6trn of assets, and we should not expect any special treatment in the negotiation coming with the EU.
Today, the most significant questions are how the financial sector will operate without the ability to ‘passport’ UK-domiciled funds and products into the EU? What would be the status of the UK-registered investment companies, UK-registered funds and fund prospectuses approved in London? Quick answers are unlikely to come, regarding the political process in the UK and the timing of negotiations with EU.
Furthermore, the consequences of this vote are ongoing. Lower net flows and weaker markets will in turn translate into falling revenues and profits for asset managers. With no quick solution and an increase of uncertainties, likely over the long term, fund companies with UK headquarters will have to establish much larger overseas offices with greater staff numbers to continue benefiting from European pass porting rules. The number of staff in London could be reduced dramatically. Such move would increase their costs significantly. And this is the best scenario. In the case of tough negotiation, as the Frankfort and Paris are expecting to grab some businesses from London, EU could prevent UK-headquartered asset managers from gaining access to European markets.
Finally, some partisans of the Brexit argued about the weight of the European legislation and the negative impact on the business for the UK companies. Financial services is a highly regulated industry, and this is not going to change. Although much of this regulation emanates from Brussels, it is unlikely that regulation is going to lessen following a Brexit. If the UK wants to continue to do business with the remaining EU Member States following the Brexit, it will almost certainly need to comply with EU regulations to meet an equivalence assessment. The only difference is that now, the UK will not be able to influence or challenge those rules.
The last development of the Brexit for the asset management companies came up yesterday. Some of the nation’s largest insurers and asset managers moved to stop spooked investors pulling money out of their funds. Investors in such ‘open-ended’ funds can usually cash in their holdings at any time even though the underlying buildings often take several months or even years to sell. When investors rush for the exits at once, as in recent days, the funds can come under immediate pressure to sell their assets to pay investors. The U.K. commercial real-estate market holds in aggregate about $1.04 trillion billion worth of assets. Yesterday, the Bank of England underlined its concerns over U.K. commercial real in its Financial Stability Report. It said flows from foreign investors into commercial real estate fell by almost 50% in the first quarter this year.
The aftermaths of the Brexit earthquake have just started. With no quick fixing solution on the horizon, uncertainties will increase.
Whichever way you look at it, there is no real upside for the asset management industry. The only real question is how big the damage will be.