Many of the world’s largest asset managers have severely underestimated the potential fallout of a UK exit from the EU, according to a number of leading analysts and regulatory experts.
Prime Minister David Cameron announced last week that a referendum on Britain’s EU membership will be held in June. Since then a large number of banking and insurance companies — including HSBC, JPMorgan, UBS and Prudential — have issued stark warnings on the consequences of a British exit, or “Brexit”, for their businesses, their clients and the wider economy.
HSBC’s report, which outlined the damaging impact on airlines, retailers, banks and London property prices, even spawned a new term on Twitter: #Brexocalypse.
Fund managers appear less alarmed and less vocal. This is despite the fact that their ability to sell funds across Europe could be seriously hampered by a Brexit.
Sean Tuffy, head of regulatory affairs at Brown Brothers Harriman, the investment group, says the fallout for fund managers “depends on how nasty the divorce gets” between the EU and the UK. “If there is an exit vote and the divorce gets really nasty, anything terrible could happen,” he says.
The prospect of a Brexit has become more real. Analysts now suggest there is a 40-50 per cent likelihood of British voters opting to leave the EU, up from around 30 per cent in December.
A lot of money is at stake. European investors account for more than a fifth of the £5.5tn of assets in the UK investment industry — more than the total size of Germany’s asset management market.
In the worst-case scenario, UK-based fund managers could be stripped of access to EU investors “overnight”, according to a senior regulatory expert who asked to remain anonymous.
He says: “This would be profoundly disruptive, leading to massive legal and operational costs and a rewriting of the regulatory handbook. A full Brexit would be profoundly negative for the export of UK asset management services.”
But only a minority of 20 large fund companies contacted by FTfm expressed any concern about Britain potentially leaving the EU.
Two standalone fund houses publicly oppose a Brexit: Man Group, the world’s largest hedge fund company, and Henderson, the UK’s third-largest listed investment company by assets.
Man Group boss Manny Roman says: “The uncertainty and potential negative consequences of Brexit for the UK’s economy should not be underestimated.”
A spokesperson for Henderson says: “We believe it would be better for our industry and our business if the UK remained within the EU. It is likely asset managers will need to comply with EU rules to continue to access the European market, even if we were to exit.”
Three insurer-owned fund companies, M&G, Aviva Investors and Standard Life Investments, are similarly opposed to a Brexit, in line with their parent companies’ position.
But the overwhelming majority of asset managers say they are agnostic on whether Britain should remain in the EU. This includes Amundi, Schroders and Aberdeen, Europe’s three largest listed fund companies by assets, as well as Jupiter, Fidelity Worldwide Investments, Investec Asset Management, Columbia Threadneedle, Vanguard, Baillie Gifford and Royal London.
Whether for, against or neutral on Brexit, the vast majority of investment companies are united in their belief that there would be limited disruption for their businesses if the referendum swings in favour of the out campaign.
In a note to analysts, the investor relations team at Henderson said: “The operational implications of Brexit are not expected to be particularly severe.”
Keith Skeoch, chief executive of Standard Life Investments, adds: “This would not be a major, major problem for us. We will ensure we can structure ourselves to continue to serve European clients.”
This confidence stems from the fact that most asset managers believe they will continue to be able to sell European mutual funds, known as Ucits, across the continent in the event of an out vote, in the same way US and Asian fund companies approach Europe at the moment.
Under the current system, an Australian fund group, for example, can establish an EU-based management company — typically in Dublin or Luxembourg — and register Ucits funds to this entity that can be sold across Europe with ease. The funds are still run by investment managers based outside the EU.
A spokesperson for Schroders says: “In the event of a Brexit, there might potentially be some additional costs in the short term around corporate and fund restructuring, but we have a significant Luxembourg-domiciled range of funds that we expect to be broadly unaffected.”
Negative consequences for UK economy ‘should not be underestimated’
Nick Thomas, a partner at Baillie Gifford, agrees: “EU-based clients will continue to be able to invest in Dublin-based Ucits. We don’t expect the UK regulatory environment to change dramatically under a Brexit scenario. Whatever happens, it will be manageable.”
But regulatory specialists, analysts and the Investment Association, an influential body that represents the interests of the UK investment industry, are much less optimistic about a “business as usual” scenario if Britain leaves the EU.
Guy Sears, interim chief executive of the IA, says Brexit “would be profoundly disruptive” for the asset management industry.
“Leaving in such circumstances, coupled with the likely loss of influence over the rules with which we would have to show equivalence to continue to operate within the EU, would not be a desirable outcome for our sector,” he says.
Analysts at Morgan Stanley, the US bank, published a note this month highlighting the fact that “investors assume if Britain were to leave the UK, a deal would be struck allowing investment management to be delegated back to the UK”.
But they believe this assumption is naive. “The chances of a ‘friendly split’ in which the UK maintains full access to the single market are low,” they said.
Morgan Stanley highlighted Schroders, Franklin Templeton, Henderson, Invesco, M&G and Standard Life Investments as particularly at risk, as between 15 per cent and 40 per cent of their assets are in Ucits funds.
Michael Clements, head of European equities at Syz, the Anglo-Swiss investment group, adds that Schroders, Ashmore and Aberdeen could be “prone to sell-offs” in the next three months due to the “uncertainty surrounding their access to the single market”.
Even if UK-based asset managers are able to use Luxembourg or Ireland-based management companies to sell Ucits funds to European investors and keep their investment teams in the UK, many other roles would need to relocate to the EU.
This includes staff overseeing risk analysis, conflicts of interest and best-execution policies, and those in charge of appointing and monitoring service providers. Distribution and sales teams could also be forced to permanently relocate to an EU base.
Justin Bates, asset management analyst at Liberum, the brokerage, believes many fund companies are “putting a brave face” on the situation.
“They simply cannot grasp what the implications will be,” he says. “[But] one can only see downside risks for London-headquartered international asset managers. There is no doubt there could be very serious implications.”
Moody’s, the rating agency, adds that problems will arise even before the referendum, as European investors will become nervous and pull money from Ucits funds.
Vanessa Robert, analyst at the rating agency, says: “There will be a long period of uncertainty and investors don’t like uncertainty. Most of the time they take their money back and ask questions later. In a worst-case scenario, there could be an impact on fund companies’ bottom line.”