With the funds industry increasingly preparing for a ‘hard’ Brexit, Mirabaud Asset Management chief executive Lionel Aeschlimann tells Mark Latham about some of the headaches that the UK’s departure from the EU is creating for Swiss banks and fund managers.
Looking across Lake Geneva from the deck of a paddle steamer on a glorious summer’s day, the scene is picture-postcard perfect.
I am on board Le Vevey, along with 100 or so well-heeled customers of the Swiss private bank Mirabaud, to watch the Bol d’Or Mirabaud – billed as the largest inland lake sailing regatta in the world. The Geneva-based private bank, founded in 1819, has sponsored the event for the past 13 years.
I am also on board to meet Lionel Aeschlimann, the genial chief executive of Mirabaud Asset Management and a managing partner of the venerable family-owned banking group, Mirabaud & Cie.
For the first time in years, there is scarcely a breath of wind on the day of the race and the 554 mono and multi-hull yachts assembled at the western end of the lake are finding it hard to pick up any speed as they embark on the 123km round trip from Geneva to Le Bouveret and back.
After watching the regatta get underway while partaking of canapés on deck, I retire with Aeschlimann to the ship’s swish art nouveau restaurant lounge to discuss Brexit and what it might mean for Swiss asset managers like Mirabaud.
As the 52-year-old lawyer and avid collector of contemporary art looks across the lake to majestic views of the Jura mountain chain and the snow-capped Mont Blanc massif, the conversation begins in a philosophical vein.
“Switzerland is a kind of a miniature of what the European Union should or will be eventually,” Aeschlimann says.
The paradox for this quadrilingual country at the centre of Europe geographically is that it remains one of the few European countries not to have joined the European Union.
Parallels
Aeschlimann, a funds lawyer who was poached from law firm Schellenberg Wittmer in 2010 to head up Mirabaud’s 8.8 billion Swiss francs (€7.7 billion) boutique asset management arm, points to a number of parallels between Switzerland and the UK when it comes to both countries’ fractious relationship with the EU.
A referendum on EU membership held in Switzerland in 1992 ended in a closer result (49.7% for and 50.3% against) than the UK’s 2016 referendum when 48.1% of voters plumped for remain and 51.8% voted to leave.
But, despite the plebiscite in favour of greater sovereignty, the Helvetic Confederation of 26 cantons has “ended up as a kind of passive member of the EU: not by choice but by necessity”.
This is because, Aeschlimann says, most EU directives are translated into Swiss law unilaterally as this is the only way that the country can maintain even limited access to the European single market.
“When you have most of the imports and exports coming from the EU, you obviously need to comply with its rules and regulations but we have no say in the formulation of those rules,” Aeschlimann says.
“I personally believe that it is better to participate in the decision-making of regulations that you will have anyway to apply in due course – even if you only have one vote among 27 or 28.”
Aeschlimann cautions against the hope, cherished by many Brexiteers, that shunning membership of a supranational body such as the EU will result in a return to the model of a sovereign state as it existed up to the Second World War.
Post-Brexit, he says, the UK’s economy will, like Switzerland, continue to be more or less dependent on the economic fortunes of its neighbouring countries.
“The Swiss National Bank is not completely sovereign in the sense that if the European Central Bank takes decision A or B, that decision will have an impact on the Swiss National Bank’s margin of discretion,” he says.
“Similarly, if the US makes certain decisions, those decisions will have an impact on the rest of the world. Things are correlated. We need to redefine what sovereignty means in today’s highly connected world.
“The EU is a beautiful organisation in the sense that its objectives and long-term mission cannot but be applauded but when a country the size and importance of the UK leaves, that is an earthquake.
“That is something that should prompt the European leaders to sit down and think carefully about what needs to be improved or fixed.”
For the 45 years that the UK has been a member of the EU, global asset managers have invested in the UK on the assumption that, from a base within the EU, they would be able to sell their funds throughout Europe.
That process accelerated in the 1990s with the creation of the EU’s single market which, together with the Big Bang deregulation of the UK’s financial markets in 1986, was largely responsible for turning London into Europe’s preeminent financial centre.
Unravel
On the back of that promise of market access to all EU countries, Swiss banks and asset managers have, over the past three decades, built up sizeable operations in London. But could Brexit start to unravel that? When it comes to wealth management, the answer is not clear-cut.
In July, Swiss private bank Union Bancaire Privée (UBP) bought London-based wealth manager ACPI in a deal that could signal that Swiss investment firms plan to bolster their business in the UK ahead of Brexit.
Although Switzerland’s much-maligned banking secrecy is now history, a third of global private wealth is still managed in the alpine country and the fear is that Swiss banks could lose business to a post-Brexit City of London.
The UBP acquisition follows recent expansions of their UK operations by other Swiss banks, such as Julius Bär and Lombard Odier as well as Mirabaud.
Aeschlimann says that the impact of Brexit on Mirabaud’s private banking operations (whose net assets in the UK account for €1.7 billion of a global €24.3 billion) would likely be limited as most of the bank’s London office clients are resident in the UK, many of them high-net-worth individuals registered for tax purposes as ‘non-doms’.
“We don’t use or market cross-border services and we don’t target European clients out of the UK, or vice versa,” he says.
The main downside is that the wealth management arm of Mirabaud might need to restructure ahead of Brexit, for example by setting up a standalone bank in the UK rather than continuing to passport services into the UK from the London-based branch of its Luxembourg-registered bank.
“There will be hassle because of the costs and the work involved, as well as no real benefit to our clients,” Aeschlimann admits.
UK clients, however, won’t be impacted, he says, as relationship managers and portfolio management teams are already based in the UK.
So far as asset management is concerned, uncertainty over Brexit has already impacted international investment houses with UK operations, many of whom have moved funds to rival EU financial centres in anticipation of the UK’s departure.
Worst-case scenario
In June, GAM, Switzerland’s largest listed asset manager, told staff to start contingency planning on the assumption of a “worst-case [scenario]” and the likelihood of a ‘hard’ Brexit.
“For us the worst-case scenario is that the UK leaves the EU completely and does not sign any kind of treaty with the EU,” says Aeschlimann. “No agreement on trade in services seems highly unlikely but it is nevertheless a possibility and would have a big impact as it would mean no market access.
“If that were to happen, investment firms would basically not be able to import services into the UK or import services into the EU from the UK.”
This would threaten Mirabaud’s Luxembourg-based Ucits investment products which are currently sold in the UK by the firm’s London-based sales force.
London is currently home to Mirabaud Group’s largest office outside of Switzerland and houses most of the firm’s fund managers, including its specialist emerging markets, UK equities, global equities, Asia ex-Japan, fixed income and European small and mid-cap teams.
In total, the firm’s Westminster office employs 100 people (out of a global workforce of 700) of whom roughly half work in asset management, 40 in securities brokerage and ten in wealth management.
All of Mirabaud’s funds (with the exception of two large-cap Swiss equity funds, which for tax reasons are domiciled in Switzerland) are Ucits funds domiciled in Luxembourg which, Aeschlimann says, would “presumably” lose their EU passport to be sold in the UK post-Brexit in the absence of a deal for financial services. This is because under the Ucits framework, which the UK will stop being part of once it leaves the EU, funds can be sold across the borders of member states.
The most likely solution is that Mirabaud would have to set up UK-domiciled open-ended investment companies (OEICs) if it wants to continue to sell its products in the UK.
“Frankly it would be a hassle and a nuisance, because it would not bring any particular value to us or our clients, but we would do it and it would not be a big issue,” Aeschlimann says.
A bigger worry is that Brexit could lead to a dismantling of the delegation model, which allows funds in one EU state to outsource the investment management of a fund to managers in another country, typically the UK – where most of Europe’s expertise is concentrated.
It is a model that is currently used by Mirabaud, whose Luxembourg-domiciled funds are managed by investment managers in London.
“If we cannot do that in the future, that would be a huge problem because I don’t think it would be easy to move our UK managers to Paris, Madrid, Barcelona or Luxembourg,” Aeschlimann says. “It would be difficult from a human perspective as well as expensive.”
Nevertheless, if such major restructurings become necessary, Mirabaud is in the fortunate position where it could simply grow its existing network of offices within the EU – in France, Luxembourg and Spain – and would not need to set up new offices and teams from scratch.
Sufficient substance
Another issue that Brexit is throwing up for cross-border asset managers is whether firms will be deemed to have enough senior staff (sufficient ‘substance’ to use the regulatory jargon) based in the EU.
“At Mirabaud Asset Management, we have risk, compliance, administrative and reporting teams already in the EU, so we are confident that eventually the impact of Brexit will be little to none,” Aeschlimann says.
He adds that, regardless of Brexit, Mirabaud – whose group assets amounted to 33.4 billion Swiss francs (€29.2 billion) at the end of June – remains committed to the UK market.
“The UK institutional market is a very sophisticated market and it is a market which we very much value, but it is also a difficult market because it is very competitive,” he says.
He expresses surprise at criticisms of the UK’s asset management industry levelled at it by the country’s financial regulator, the Financial Conduct Authority, which concluded in a report into the sector that active funds represent poor value for money.
The report called for greater transparency on fees and measures to increase competition.
“The UK market is consultant-driven and the consultants act as gatekeepers. As a result, competition is fierce on all accounts including price and it has been so for the last 15 to 20 years,” he says.
“We invested in the UK because we believed in the UK and continue to believe in the UK.
“Despite Brexit and what many people say, we are convinced that the UK will remain a very important management centre on all counts. I think the catastrophe predicted by many might well not happen.
“But again it is very difficult to predict the outcome, so we have to prepare for the worst and hope for the best.”
We return to the deck to catch up on the regatta, but the lack of wind means that most of the yachts have barely moved more than a few kilometres after more than an hour of sailing.
In a race that often takes less than six hours, the fastest boat this year does not make it past the finish line until after midnight – more than 14 hours since setting off. An apt metaphor, perhaps, for the current state of Brexit negotiations.
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