London asset managers face new Brexit threat

LONDON: British-based investment firms’ long-standing ability to manage billions of euros of assets elsewhere in Europe could be threatened by Brexit, new EU guidance suggests.

Asset managers in London oversee funds worth 1.2 trillion euros (US$1.4 trillion) in the EU – more than their peers in France, Germany and Italy combined, according to figures from UK industry body the Investment Association.

Previously, many mangers had said they expected the impact of Brexit on their operations would be minimal compared with the reorganisations faced by many international banks and insurers.

But now EU regulators have issued guidance on how they plan to scrutinise ‘delegation’ – a manager in one country overseeing assets in another – after Britain leaves the bloc in 2019.

The guidance is aimed at preventing investment firms setting up ‘empty shell’ subsidiaries in an EU country, to allow them to continue serving European clients, but leaving the bulk of their management staff and operations in London.

Any new subsidiaries must not delegate tasks to another country to an extent that exceeds by a ‘substantial’ margin the tasks that will be carried out locally, the European Securities and Markets Authority (ESMA) said. Portfolio and risk management cannot be delegated entirely.

There is room for interpretation in terms of what constitutes a ‘substantial’ margin, but without delegation asset managers would have to relocate operations to the EU to manage funds from there, driving up costs.

The ESMA policies raise the question of whether decades of delegation arrangements should be called into question, said Leonard Ng, a lawyer at Sidley Austin. The guidance was handed to national regulators this month, to stop them offering ‘light-touch’ deals to win a slice of the UK financial services market, Europe’s biggest.

ESMA said it did not spell an end to delegation. “It means that each situation has to be assessed on a case-by-case basis, based on the issued outlined in the opinion,” said a spokesman for the Paris-based EU agency.

But Andrew Bailey, chief executive of the Financial Conduct Authority (FCA), which regulates funds in Britain, made it clear ESMA’s opinion was a threat to the delegation model.