What does Brexit mean for funds?

Written by: Tom Huelin Posted: 06/11/2017

BL53_BrexitGuernsey and Jersey remain cautiously optimistic ahead of Brexit, but just how will the UK’s departure from the EU affect the Islands’ funds industries? 

“Where do we go from here?” went the not-so-cheery refrain of 1990s doom merchants Radiohead. “Words are coming out all weird. Where are you now, when I need you?” It’s easy to imagine Brexit Minister David Davis muttering these pessimistic lines of worry and dread to himself as he trudges off to Brussels for his weekly scrum-down with EU adversary Michel Barnier. 

The pair have been tasked with agreeing terms of the UK’s departure from the European Union following Theresa May’s triggering of Article 50 in March. Early signs suggest it will be a long, protracted process with consensus rather difficult to achieve. Where do we go from here indeed, David?

Ever since the UK voted to leave the EU in 2016, politicians, commentators – pretty much everyone in the country – have been frantically trying to understand the impacts that Brexit may, or may not, bring. How will the UK trade with Europe? What will happen to freedom of movement? These are just two issues to resolve before the March 2019 deadline. 

How the UK’s financial services industry is affected by all this is another key factor, one which both Jersey and Guernsey will be keenly monitoring. 

And while the markets are likely to show some volatility over the coming months, what specifically of the funds industry, both in London and the Channel Islands? Will UK fund managers have to relocate to mainland Europe? Will the UK be able to continue using the islands’ offshore funds and outsourcing functions? 

Despite the uncertainty, confidence in the Channel Islands funds industries is on the up. According to State Street’s Brexometer Index, 45 per cent of investors now expect positive economic growth in the next three to five years – that’s up 13 per cent from late 2016.

“I believe Brexit will impact the Channel Islands’ funds industry positively,” explains Paul Mundy, Head of Alternative Investment Solutions (AIS), State Street in the Channel Islands. “The experience, reputation, knowledge and regulation we have here is recognised globally. I don’t see that changing – if anything, it springs opportunity.” 

Positive thinking

Jersey and Guernsey have spent decades developing mature financial centres that look well-positioned to weather the Brexit storm. With strong links to both the City of London and mainland Europe, perhaps opportunity really will knock for the islands’ funds industries. 

But is it relocation, relocation, relocation for London-based fund managers? “It’s really got nothing to do with being in or out of the EU,” says James Athey, Senior Investment Manager at Aberdeen Standard Investments. “Most UK asset managers have fund ranges to already meet the needs of the different client bases in the UK and continental Europe, so the UK leaving the EU shouldn’t have a massive impact.”

The data backs up the fact that investor sentiment in the funds space remains high. Funds under management in Jersey topped £263bn in June 2017, while research by Preqin found that, of UK hedge fund managers surveyed, only four per cent were considering leaving the UK for elsewhere in the EU as a result of Brexit. 

“Our funds industry is growing,” says Emily Haithwaite, Partner in the investment funds group at law firm Ogier. “We haven’t seen any signs of a slowdown, and certainly nothing to say that Brexit has created a dip in funds or managers in Jersey. Our funds practice is as busy as ever with new instructions, including a large proportion from UK-based managers.” 

Guernsey is a similar story, with total funds under administration and management worth more than £271bn, according to the latest figures. Both islands have benefited from building relations with investors and regulators on both sides of the English Channel as Paul Smith, Chairman of the Guernsey Investment Fund Association, describes. 

“Over the years, the Channel Islands have operated as third countries to the EU. We have a Channel Islands office in Brussels, and we’ve negotiated various opportunities within Europe. That shows that the islands have had a good relationship with the EU. And I think, and hope, that will continue,” he says.

Indeed, the islands are past masters at operating outside of the EU while trading with the continent – and the rest of the world – through independently negotiated bilateral agreements. It’s an approach the UK will need to adopt post-Brexit. 

And it appears that the Conservative government is well aware of this. Robin Walker MP, part of Davis’s Brexit team, was sent to the islands on a fact-finding mission earlier this year. “He was very positive,” says Smith, who attended meetings with Walker. “He was keen to listen to our views and suggestions on how the islands and the UK could work closer together going forward.”

The UK’s intention to work closely with the Channel Islands through Brexit and beyond has been warmly received by local businesses, as Jean-Paul Peters, Head of Funds Banking at RBS International Guernsey, explains: “It’s refreshing to see, because the Channel Islands do have a part to play, both in terms of our experience of being outside the EU, but also being classified as third countries ourselves and successfully working within the European Commission’s regime from a financial services perspective.”

UK ‘midshore’ option

It’s feared that Brexit could adversely affect the Channel Islands if the UK were to position itself as some kind of offshore jurisdiction to rival the islands. But it’s a move Geoff Cook, CEO of Jersey Finance, believes would be counter-productive. 

“If the UK wants to incentivise through tax, they’d have a job getting a good settlement through Europe. If you want to try and undercut competition while trying to win partnerships with them, I think it would be a really bad move.”

J-P Nowacki, Managing Director of London-based CSC Capital Markets Europe, agrees, suggesting instead that the UK and Channel Islands could work better together in the future than they have done before. “The UK positioning itself as a ‘midshore’ tax centre – it will never get as low as the Channel Islands, but could be low enough to drive some structuring into the UK – could in turn drive funds into the Channel Islands as well.”

A report by KPMG in 2015 revealed that Guernsey alone acted ‘as a conduit for £24.6bn of inward investment into the UK from global investors’, and there’s no reason to suggest this relationship can’t continue post-Brexit. In fact, the islands could benefit further, should the EU lift restrictions that make selling their funds into the UK more difficult.

Whether Brexit is fully agreed by March 2019 remains to be seen. It’s not looking overly promising right now – perhaps no deal will indeed be better than a bad deal, as Prime Minister May suggested at the start. But whatever the outcome in London and Brussels, proactive planning has allowed Jersey and Guernsey to be informed about the possible impacts of Brexit, making both jurisdictions cautiously optimistic about the future. 

“The UK government has said the Crown Dependencies will be factored into their thinking when they’re negotiating new settlement instructions,” Geoff Cook concludes. “We’ve got good bilateral arrangements with European countries, so there’s no reason why anything should change there. Growth outside of Europe is strong, and we’ve still got full market access to the EU27 and Britain, so we’re in good shape. But we’re not complacent.”

AIFMD stuck on the back burner

The European Securities and Markets Authority (ESMA) ruled in July 2016 that there were no significant obstacles impeding Jersey and Guernsey from applying for an Alternative Investment Fund Managers Directive (AIFMD) passport. 

The passport would allow the islands to market their funds to EU investors, which is currently only available to EU jurisdictions. The islands have been positively assessed by ESMA for the passport, but the application was put on hold following the Brexit referendum.

The islands are still able to market funds to EU investors via national private placement schemes. Other alternatives for the islands include prioritising fund marketing to non-EU countries, as Ogier Partner, Emily Haithwaite, explains. “For example, for US managers who don’t need to access EU investors, we can offer them a regime that’s totally outside of the AIFMD.”

Private placement schemes should remain available to the islands until at least 2018, when passporting may be revisited by ESMA. 

 


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