Britain's fund managers are in denial about Brexit

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(Bloomberg Gadfly) -- With a year to go before Britain leaves the European Union, nervousness about Brexit's impact on the asset-management industry is growing -- and rightly so.

The CFA Institute recently surveyed almost a thousand of its members, with most respondents employed by buy-side firms. About a quarter work in the U.K, another 25 percent in other European Union countries and the remainder from the rest of the world.

The survey highlights how Brexit is undermining London's status as a financial center: Some 85 percent of respondents reckon the city will be a likely loser. Just 7 percent see the capital benefiting, down from 10 percent in last year's survey.

U.K.-based CFA holders have become increasingly pessimistic about the prospects for employment in their domestic market in the past year. The proportion of respondents expecting staffing levels to fall climbed to 67 percent from 62 percent. They are still, however, more optimistic their peers in the rest of the EU, of whom 76 percent see employment shrinking, up from 71 percent in 2017.

It's the post-Brexit regulatory outlook, though, which poses the biggest threat to the industry. And it's here that attitudes, geographically at least, diverge the most.

In the most recent draft of the EU's negotiating stance, the U.K. will be offered after Brexit an ambiguous status termed "improved equivalence." British financial firms would have access to EU markets as long as EU bloc deemed the country's rules to be equivalent to its own -- a right that could be withdrawn at any time. No wonder Chancellor of the Exchequer Philip Hammond has called the proposal "wholly inadequate."

And as the chart above shows, most respondents from the EU don't expect the U.K. to remain in alignment anyway. Just 39 percent anticipate regulatory equivalence to be maintained, compared with 51 percent of British replies.

Given the U.K.'s oft-voiced reluctance to become a rules-taker -- subject to new EU regulations that it won't have had any say in drafting -- the British optimism about the future of regulatory equivalence seems misguided.

The bigger threat to the fund management industry lies in how the EU reinterprets the so-called delegation arrangements that allow funds to be marketed and sold in one country while the actual management of the money takes place elsewhere.

The European Commission wants to give the European Securities and Markets Authority increased powers over the funds industry. ESMA would have the final say over whether delegation rights apply, or whether firms will have to increase their physical presence within the bloc to continue to service customers based there.

The shift wouldn't just affect British asset managers selling UCITS, the EU version of mutual funds, across the region. U.S. firms are lobbying against the change, as is the Association of the Luxembourg Fund Industry.

On this issue, at least, the survey's U.K.'s respondents seem more attuned to the likely consequences of Brexit than their peers elsewhere. Almost half of them expect a restriction of delegation rights leading to higher costs or worse investment outcomes for clients.

They're right to be worried. ESMA published guidance last year suggesting it will take a hard line in insisting that "board members and senior managers in the EU27 have effective decision-making powers." In other words, the days of listing funds in Dublin or Luxembourg for tax benefits and managing the portfolios in New York or Hong Kong or London may be drawing to a close.  

Protectionism is on the rise around the world. The EU has an opportunity to steal business away from London that it seems unlikely to forgo. And the post-Brexit landscape for asset managers looks rockier and rockier.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Mark Gilbert is a Bloomberg Gadfly columnist covering asset management. He previously was a Bloomberg View columnist, and prior to that the London bureau chief for Bloomberg News. He is the author of “Complicit: How Greed and Collusion Made the Credit Crisis Unstoppable.”

©2018 Bloomberg L.P.

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