InvestmentEurope discusses the impact of Brexit on the Luxembourg financial services industry with Justin Partington, who recently joined Luxembourg-based SGG Group as fund solutions leader and member of the Group Executive Committee.
As investor services firm you might be in a position to provide us a bird’s eye view on the impact of Brexit on Luxembourg, to what extent has there been a migration of asset managers from London to the Grand Duchy?
We are now increasingly seeing London-based clients actively looking amongst the team to identify at least one person, perhaps their CFO or CEO to move to Luxembourg in order to set up and AIFM or Ucits presence and to allow them to potentially move their funds structures.
We are not seeing entire funds migrate but there is growing nervousness around the Channel Islands and UK funds, Brexit is causing fund managers to set up a hedge in Europe.
For example, M&G has already set up a Luxembourg operation and so has Blackstone. Other big players like BlackRock, Carlyle, Aberdeen and Standard Life are currently considering Luxembourg.
The key initial question is, does the fund manager have European clients as end investors? In general, European clients all require regulated funds. And while some smaller UK asset managers might initially be able to focus on offering unregulated funds to UK investors, once asset managers outgrow their small base, they need to target institutional investors, which means ensuring that their funds are regulated.
How will Brexit negotiations affect the status of third countries which are currently hosting risk- or portfolio management services for asset managers?
Besides the challenge of distributing funds, there is also the question of risk or portfolio management being located in third countries. At the moment, the EU allows delegation of these tasks to Non-EU “third countries”, which means for example that a fund adviser managing the portfolio could be based in the UK and have its risk management in Luxembourg. For example, M&G has set up part of its back office activities, including about 20 staff members in Luxembourg.
This should not happen, it might appear to be good for Luxembourg but it would be bad for the fund industry, it would also have a negative repercussions with other third countries such as the U.S. and Singapore. Besides, for a small country like Luxembourg, forcing big asset mangers to relocate all their activities would represent a massive challenge to local employment, infrastructure and housing market. Restricting delegations of risk or portfolio management to third countries is a protectionist measure and extremely unhelpful.
What are the risk of a regulatory bonfire in the UK?
I think it is unlikely that the UK will be able to completely overthrow existing EU regulation. They will need to think very carefully what the implications of doing so are if they still aim to be recognised as third party. It would be very contradictory to then introduce massive changes to financial services regulation. They will not be able to change the core of Ucits and AIFMD. What we might see instead is them drifting ever so slightly away from the interpretation of some EU directives. However, there is a risk that the EU might turn around and then transform these directives into regulations, making it legally binding to implement them into national law.
One problem the industry is facing is the fact that fund managers are more rule takers than rule makers. The buyside is very well funded but can’t shape the industry in the same way that investors can, they often have a much clearer picture of what they should be investing in.
But instead the buyside tends to be very quiet throughout negotiations for new regulations, you don’t get for example big pension funds commenting on negotiations around AIFMD. Fund investors see themselves much less as a standalone entity, even though they could really help the process by contributing their views.
This interview is part of Investment Europe’s cover story on Brexit and the fund industry, which will appear in the March issue.