With some 60% of UK managed assets from overseas clients coming from Europe, the latest annual survey by the Investment Association has highlighted an area of risk to the local industry linked to Brexit, although it has also said that the industry has put considerable effort into preparing for any potential outcome from the Brexit process.
Some £3.1trn of total managed AUM of £7.7trn comes from overseas clients, with £1.8trn of this from savers in Europe, the IA notes. Its latest figures to the end of 2018 suggest that the past year saw the biggest increase in foreign client-derived monies from North America, up 11% to £565bn on the previous year.
"Overseas investors in UK domiciled funds are an important facet of the UK funds landscape but Brexit is driving down the proportion of UK domiciled funds held by these investors," the Association noted in its survey.
"So far, the most significant factor in this decline appears to have been operational decisions made by firms to ensure business continuity post Brexit. Chart 50 shows funds under management in UK domiciled funds and the profile of investors in those funds since Q1 2016, just before the Brexit referendum. £1.04trn was managed in UK domiciled funds in 2018, of which £46bn or 4% was managed on behalf of overseas investors. This compares with 7% just before the referendum."
"The steep drop observed between Q3 and Q4 2018 in Chart 50 was largely precipitated by operational decisions made by firms to transfer assets in nonsterling share classes to funds domiciled in the European Union. It is more difficult to quantify the impact of negative overseas investor sentiment or to predict future trends."
The annual survey also highlighted concerns around liquidity sparked by possible failure to agree trading obligation rules between the EU27 and the UK due to Brexit.
"The Trading Obligation for equities and derivatives has attained a much greater importance with the crystallising of Brexit. Whilst the proposed EU27 wording had been finessed, for example for Switzerland, it remains a significant issue. Any UK Trading Obligation is likely to have a material impact on firms trading obligations. In the absence or reciprocal equivalence between the EU and the UK, post-Brexit the Trading Obligation could present a significant obstacle to achieving best execution for clients and fragment liquidity in the long term," the Association warned.
Additionally, it noted: "Esma has been working on identifying third countries which should be deemed to be sufficiently equivalent that the AIFMD passporting regime should be extended to them. In 2016 they submitted advice to the Commission regarding twelve third countries, however the Commission has yet to publish its proposals. This process has proven politically contentious, which may be further impacted by the Brexit negotiations."
"The FCA is also taking necessary steps to develop its own benchmark register for use post-Brexit. Firms will need to ensure that the providers of all benchmarks that they use are registered with the FCA by the end of the two-year transitional period."
Despite the challenges identified, the Investment Association remains upbeat about the future prospects for the UK industry, noting that the UK has "more assets under management than the next three European centres combined (France, Germany and Switzerland)."
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