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Today New City Initiative is comprised of 45 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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Brexit: An Update

Published by Charles Gubert

Brexit: An Update

Another week, another Brexit drama. The release of the eagerly awaited Brexit white paper by the UK government was welcomed in some quarters for bringing clarity around the country’s impending departure from the EU, something which a number of sectors including financial services have been urging for since the June 2016 referendum aftermath. Nonetheless, not everybody is happy with what has been published.

The financial services industry has been left disgruntled by the paper’s contents, mainly because the government confirmed it will not pursue a mutual recognition policy, an approach which in theory would have reduced some of the frictional headwinds of Brexit. Instead, the government is pushing through with an association agreement, comprising of a free trade area for goods, but pointedly excluding financial services, a decision that is poised to limit UK (and EU) firms’ unimpeded access into each other’s respective markets.

A number of industry bodies had implored the UK government to adopt mutual recognition, instead of equivalence, citing the latter was notoriously capricious and could be removed at less than 30 days’ notice, an unacceptable risk for many financial services firms in the UK to stomach. While UK regulatory bodies such as the FCA had said that mutual recognition with the EU was eminently achievable, policymakers in Brussels thought otherwise.

The government’s position on financial services – while not in tune with the City’s thinking – is relatively pragmatic and supports an expanded version of the existing equivalence regime.  Recognising the current framework for withdrawing equivalence is a risk to UK financial services, the government has asked EU negotiators to consider creating what it has termed a “structured withdrawal process”, whereby equivalence cannot be arbitrarily taken away unless a consultation is launched to discuss possible resolutions to maintain it.

In addition, the paper said cross-border data flows will continue, as will the free movement of skilled persons post-Brexit. Reassuringly, the paper confirmed it will support the mutual recognition of qualifications, something which had been asked for repeatedly by financial services professionals. While the latest proposals are likely to find more traction inside the EU, policymakers on both sides are simultaneously stepping up their efforts to implement contingency plans for a no-deal Brexit.

The likelihood of a deal may have increased but fund managers should not lose focus on Brexit. EU regulators have repeatedly warned UK fund managers that they need to start submitting their applications for authorisation by mid-year (i.e. now) to member state regulators if they want to continue marketing into the EU27. The regulators added national competent authorities (NCAs) in the EU could become overwhelmed if applications all arrived simultaneously, so firms should make their submissions in good time.  If fund managers fail to obtain NCA approval on time, they risk being excluded from the Single Market.

Asset managers with large European distribution footprints are in something of a bind over Brexit as they do not want to incur large legal costs preparing for hypothetical risks, while at the same time they cannot afford to lose their EU business or passporting rights. Most firms with investors in Europe are playing it safe and readying themselves for EU authorisation irrespective of the costs involved.

Industry fears, however, that delegation would be abandoned have largely disappeared. While the European Securities and Markets Authority (ESMA) has confirmed it wants more involvement during the authorisation of delegation arrangements, it acknowledged the existing model works perfectly well and the agency did not want to undermine it, not least because it would antagonise non-EU users/buyers of UCITS and AIFMD products.

Furthermore, the AMF (Autorité des marchés financiers) publicly said it had no intentions of restricting delegation although that decision will ultimately be determined by ESMA, and not the French regulator. While UK firms should be assessing their options about appointing management companies or establishing subsidiaries inside the EU, most experts believe the current delegation framework will not be dramatically altered post-Brexit.