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Breakaway state: The financial services ‘leap into the unknown’ on Brexit


Advisers face years, if not decades, of uncertainty in the event the UK decides to withdraw from the European Union. The impact of a “leave” vote is expected to have far-reaching implications spanning the breadth of UK financial services, including regulation, how funds are sold, and ultimately for clients.

Now the date for the EU referendum has been set for 23 June, the battle lines are beginning to be drawn across the financial sector between those in favour of remaining in the EU and those who see the UK’s future outside it.

The financial services industry is just beginning to grapple with what a Brexit would involve. Much will depend on the model adopted in the wake of a UK vote to leave, ranging from maintaining a degree of involvement with Europe to a full divorce.

Pulling out of the EU would be far from “business as usual”. So what are the models on the table for the UK’s potentially new place in Europe? How would existing European regulations be affected? And what could the “leap into the dark” really look like in practice?

The Norway model

Following Prime Minister David Cameron’s package of reforms negotiated at the EU summit last month, talk has turned to the options facing the UK in the event of a Brexit. One of the often quoted models is a Norwegian-style agreement, under which the UK is part of the European Economic Area but still has to adopt EU rules and regulations. Under this model the UK has little influence over what the rules are.

Fund administration firm Brown Brother Harriman senior vice-president Sean Tuffy says: “It really depends on how acrimonious the split is between the EU and the UK. If there is a Brexit vote and the UK goes to the Norwegian model there will probably be little change. If the split is less friendly and the UK ends up out in the cold from an EU perspective that could have much larger ramifications on how firms access EU markets and the structure of funds businesses.

“If the UK goes the Norway route it will have to implement European rules regardless. If it exits completely, then at that point it is no different to New York, where they don’t have Mifid rules. That could have a pretty big impact on investment activity.”

Investment Association interim chief executive Guy Sears says: “Our analysis concludes should there be a full UK Brexit that resulted in the UK having third-country status, then it would be profoundly disruptive for the export of asset management services and products, as well as  potentially having consequences in other areas, such as access to market infrastructure.

“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. Clearly, however, there are alternative models which might reduce this impact and, for that reason, it is extremely difficult to predict precisely the longer-term consequences for the asset management sector.”

Brace for regulatory impact

Some commentators argue as the FCA and the Prudential Regulation Authority has taken the lead on financial services regulation such as the RDR compared with their European counterparts, nothing much will change in the event the UK votes to leave the EU. But not everyone is convinced.

Pinsent Masons head of strategic development for pensions Robin Ellison says: “On investments it’s a mixed blessing – the good news is a lot of the EU regulations will not apply. The bad news is more complicated British ones will have to be introduced at some stage. It will be just as complex, but a different kind of complexity.”

Ellison says pensions have been subject to many European Court of Justice rulings in recent years, and it is unclear how a Brexit would impact existing decisions.

He says: “It will be a mess in the interim because of the way case law in Europe works. It will not be clear how long existing decisions will last for and whether rules still apply and how long for. There will be uncertainty for 10 to 15 years while they work it out. The dream of England on its own leading to simplified regulation is just a fantasy.”

Wealth Management Association deputy chief executive John Barrass says: “Brexit would not mean there will be less or easier regulation. In the EU regulatory framework for financial services, a lot of the pressure for the rules we have has come from the UK. The FSA and the FCA have led on EU legislation on conflicts of interest, commission, definitions of independence and product governance. People should be realistic about this. If people vote out, they won’t get less regulation but they may get more finely tuned regulation.”

Barrass warns about any move to unpick European regulation already in train, such as Mifid II and Priips. Even if the UK leaves, there still may be “equivalence tests” to show UK financial services regulation is in keeping with rules coming from the European Commission. He adds: “If anything changed with those regulations we would need to have something that is equal to or stronger than the EU arrangement. But even if we do vote to leave there will be a two-year limbo period during which the UK would prepare to leave, and nothing much would happen.”

Passport problems

Another issue that has been identified is what happens to the Ucits passport currently available for funds marketed in the EU. The passport allows fund managers in member states to take funds domiciled within the EU and market them either in their own country or other member states. Under a Brexit, that cross-border access would cease.

Barrass says: “There will be rearrangements within businesses so they have parts of their business within the EU to do the passporting. For big multi-national firms this won’t necessarily be a big problem.

“But if you are a single office company in the UK, you will need to set up a new establishment [in the EU] and re-register, so there will be costs there. It all depends on how the firm is set up and structured.”

He says the passporting issue will also hit clients, and by extension, advisers. “Firms will not be able to passport to service clients who decide to retire abroad, for example. The issue of managing clients’ portfolios in the EU from the UK will become more complicated because they won’t be able to access them direct. You would have to get re-registered and reauthorised by the regulator of the country the client has moved to, and that will almost certainly involve setting up an establishment in that country.

“A small wealth manager in the UK will all of a sudden be faced with the cost of setting up in another EU country. Will they do that or will they be forced to abandon the client? The reality is we don’t know.”

Analysis by BlackRock on the impact of Brexit suggests UK-based Ucits funds might have to move their jurisdiction to a country within the European Economic Area, which would mean outside the UK if the decision is made for full-blown separation. The firm says this would likely generate a taxable event for investors.

‘Difficult transition’

JP Morgan EMEA and Europe chief market strategist Stephanie Flanders argues in the longer term a UK exit from the EU would not detract from the success of the UK economy.

But she says: “We don’t know what the new system is going to look like, and the transition could be very difficult. I am less concerned about big market moves and the sterling than I am about the individual companies that we are invested in. How skilled do we think they are in navigating that new environment?”

The details of how a Brexit would come to pass are still being worked out but it is clear a UK on its own would have significant implications for financial services.

Old Mutual Global Investors chief executive Richard Buxton says: “There is no precedent for a country leaving Europe so there is no blueprint for how it will work. There will be extraordinary uncertainty, and it could well take years to leave.”


Click here to enlarge

Adviser views

Lee Robertson, chief executive, Investment Quorum

The Brexit effect can already be observed in financial markets but this was to be expected as soon as the Prime Minister announced the day of the referendum. If Britain were to vote “leave”, then the immediate aftermath could be rather messy, with the UK’s GDP suffering, constraints on further fiscal policy, weaker growth slowing deficit reduction, and a possible downgrading of our credit rating. Undoubtedly, opportunities in the UK market will exist but it is very much a stock-pickers market.

Trevor Whiting, managing partner, Core Financial

The impact of Brexit in the short and medium term will be difficult for financial services because of the consequences of a renegotiation deal with the EU. The rules will change so it is unclear what the business landscape will look like. I am eurosceptic but I know the EU brings certainty and good policy. But now there is a fear of the unknown as we cannot predict the future to our clients.

In numbers

23 June

Date set for EU referendum


Amount of assets managed by the UK for European clients that have access to a Ucits passport. Under Brexit, the passport would be lost


Estimated reduction in GDP over the next 15 years in the event of a Brexit


Expected fiscal policy measures in wake of leave vote include a cut to base rate and a further round of quantitative easing

Source: Investment Association, Axa Investment Management, JP Morgan



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There are 11 comments at the moment, we would love to hear your opinion too.

  1. We face years of uncertainty anyway – we have the FCA remember.
    For advisers, uncertainty has been a staple of the diet for as long as I can recall.

  2. “Advisers face years, if not decades, of uncertainty in the event the UK decides to withdraw from the European Union” – effectively business as usual then. Is there some suggestion from this opening statement that advisers have been operating in a consistently predictable commercial environment over recent years?
    Presumably the argument here is that the UK will abandon all elements of MIFID 1 and 2 and that there will be an overnight free-for-all.
    “One of the often quoted models is a Norwegian-style agreement, under which the UK is part of the European Economic Area but still has to adopt EU rules and regulations”. According to the EFTA Secretariat, between 2000 and 2013 the EU generated 52,183 legal instruments, of which Norway adopted only 4,724 – i.e. 9 per cent. Furthermore, the only reason that Norway pays more to the EU than other EFTA states is that it chooses to opt into as many common EU projects as possible – there is no treaty obligation on its part to do this.
    No mention here of the fact that Norway is the wealthiest country on the planet, with the best quality of life (according to the UN Human development Index) – even without the EU.
    Some of the “certainty” that many commentators crave may not be of a welcome variety.
    By the way, the Remain camp`s “Leap in the Dark” is a phrase that has ironically been borrowed from Lord Derby in 1867, which ironically referred to a move to increase representation among the people – quite the antithesis of the EU`s undemocratic approach to most matters.

  3. Any reason why it should take an hour and a half to “moderate” an innocuous comment that disagrees with your headline?

  4. It is absolute nonsense to talk about the ‘Norway Model’.
    1. They have to abide by all the rules, but with no say or input. That would be a retrograde and very stupid step for the UK.
    Any comparison with Norway just demonstrates the ignorance of those who mention it.

    Norway has a population of 5 million – not even the size of London. For years they have been swimming in oil. They hardly need to use any for themselves as they have plenty of Hydro Electric power. Their oil exports (2015 figures) represent 70% of total exports. Their imports are miniscule rep[resenting about 17.5% of GDP. (Our figure is 26%). They have the largest sovereign wealth fund in the world – making them richer that the richest Arabs.

    Anyone would think that we managed our affairs so wonderfully. Every day there are complaints about our regulation – hardly any of which is the fault of Europe. This isn’t so much different form our lamentable failings in other spheres. Sure the EU may not be perfect, but at least they don’t lay claim to the following:

    The UK has:
    a. Lowest state pension in OECD
    b. Worst rates of cancer recovery in Europe
    c. Worst rate of child literacy and numeracy in the developed world
    d. Most obese in Europe
    e. Highest transport costs in Europe
    f. Worst productivity rate in G7
    g. Children in the UK are more likely to die before they reach their fifth birthday than in any other western European country except Malta. Almost five in every 1,000 children born in the UK die before the age of five. 3,000 children in the UK died before their first birthday in 2012. (Institute of Health Metrics and Evaluation (IHME)
    h. Highest overall debt in the World (Public & private including Private Finance Initiative, household debt and student debt – excluding mortgage,) Our Public Debt is now £1.5 trillion – this now approaches 90% of GDP. (ONS, DWP, HMRC, G20, OECD)
    And here’s one statistic to be really proud of:
    BRITAIN is the most tattooed nation in the world, with an estimated 20 million designs decorating our bodies and the number of parlours more than doubling in just three years.

    Let’s not her too much about the Brexit advantages. From the forgoing it would seem that those who govern us would make a right Horlicks.

  5. Couldn`t agree with you more, Harry. I mentioned Norway solely in the context of rebutting the original theme of this piece that “the UK goes to the Norwegian model” – a strange premise in itself, given that all non-EU states have negotiated different deals to reflect their particular economies.
    The rest we`ll just have to agree to differ about, as I remain unconvinced that the EU`s magic wand will wave away what you see as the UK`s fat, stupid, tattooed children. Nor do I believe that the creation of higher State pensions will do a lot to help our burgeoning debt position.
    No need to taint your facts by mentioning the 40 – 50% unemployment levels among under-25s in Southern Europe – at least they won`t be able to afford tattoos or eat too much.

  6. So what’s new, advisers face uncertainty every six months, its called the Budget. We also have regulation which changes every day.

    I note no one is mentioning if we stay we will have to with Germany bail out half of the EU.

    I would prefer to hold our countries future in our hands, up hold and set our own laws than to give it to Brussels and watch them bleed us dry. They have tried on many occasions to move the city of London to Brussels, if we stay in it will be the green light and we will have no say.

    I do not believe these doom merchants that it will take 10 years to sort out, it will only take the Brussel unelected MEP’s 10 years, industry will have it sorted in months.

  7. Julian Stevens 4th March 2016 at 8:05 am

    It seems abundantly clear that if Britain does leave the EU, the one thing we shouldn’t adopt is the Norwegian mode. Get out and get right out.

  8. Well there is another thought. What specific personal detriment have readers suffered as a result of our membership? If you were a fruit picker you may well have had a personal reason, but for many in the UK any direct impact has been negligible if not nil. My only example is the fact that we now have multiple dustbins to comply with recycling. Irritating but no big deal compared to the pain our own governments inflict.

    Compare this to the impact we all suffer daily from our own Governments. Orrible Osborne is mooting innumerable ways to make our pensions worthless. Today’s headlines in the dailies have brought up the possibility of a pension ISA – i.e. No up-front tax relief at all, but tax-free on exit. I’m sure a 30 year old will be ecstatic. Who will trust a future government to keep that bargain? This is but one example. Daily we read of chaos in the NHS – again nothing to do with Brussels. If you commute to work it costs you an arm and a leg to use public transport – again not the fault of the EU – and so it goes on.

    Yes, people try and forecast – on both sides of the argument – but that is crystal ball gazing. What we have and don’t have right now is a far more down to earth way of trying to assess the situation.

  9. So the pro-EU argument is that small business does not suffer from any additional red tape as a result of membership, that the NHS does not have any additional pressures on it through national government`s failure to determine the type of immigrant its economy actually needs and that it is much more sensible to hand over billions to a supranational power in the hope it will have the largesse to give most of it back for the right purposes.
    Sounds compelling.

  10. I’m mildly surprised to see quite so many business “leaders” forgetting the golden rule of business.

    There is nothing to be gained and everything to be lost by sticking your corporate nose into politics.

    The most sensible comment seems to be from Neil Woodford, being strictly neutral, whilst pointing out some flaws in the thinking of many.

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