Death by a thousand cuts
But counting the number of jobs that the UK will lose as a result of Brexit will be harder, because it is not just a matter of counting jobs that have been relocated elsewhere. The calculation should also include those that would have come to London without Brexit.
Asian or American firms wanting to expand into the EU market, for example, are unlikely in future to choose London and more likely to instead choose Frankfurt, Luxembourg, Amsterdam, Paris, Milan or Dublin.
“That is, in my opinion, where the biggest loss of opportunity lies. There will not be a sudden outflow of people, but a slow erosion that you will see in London spread over the next ten to 20 years. That is the timeframe it will take to really see the impact of Brexit.”
Mackel’s views are backed by Stéphane Pesch, chief executive of the Luxembourg Private Equity & Venture Capital Association, who says that maintaining the closest relationship possible between the EU and the UK is in the interests of both sides.
“We would like to continue our cooperation with the UK as a strong partner specifically on private equity,” he says. “London was always the capital of Europe for that asset class.”
Brexit has brought more private equity business to Luxembourg, he says, as City firms look to maintain their EU passporting rights.
“Anything might happen over the next weeks and months and everyone should try to cut the best deal in favour of the entire industry for the future.
“Even with London outside of the EU, the City is a really important global player and that should be maintained at all costs. We cannot let the entire industry move to Asia, the US or somewhere else. We have to be one of the big players.
“If there is no deal and lots of extra taxes and no passporting rights, that really will not be helpful and would also mean a slow decrease of power and substance in the UK. I honestly don’t see that as positive for anybody.”
Marc-André Bechet, deputy director general of the Association of the Luxembourg Fund Industry, says the “big question mark” for the cross-border funds industry is the future of delegation.
While it was “reassuring” that the European Commission had confirmed in a “readiness notice” published in July that the delegation model would continue, Bechet admits that that could change in, say, two or three years’ time. “But from the first of January, there will be no immediate cliff-edge effect on funds and nothing will change in one sense,” he says.Parallel to the growth of Luxembourg as a fund domicile, the Grand Duchy has also, since the 2016 Brexit referendum, grown as a fund servicing hub and it now services around €4 trillion of funds.
Daniela Klasén-Martin, group head of management company services and managing director in Luxembourg for the asset-servicing firm Crestbridge, says distribution that relies on an EU-wide marketing passport will become more challenging from next year.
“Our model as a third-party management company is that we appoint initiators to be the portfolio manager and also the distributor, and in the UK they currently use a MiFID licence to perform that activity and distribute across Europe – but from the end of the year, they will not be able to use that licence,” she says.
“That is the key issue and it is unclear how you can accommodate that in a delegation mode structure.” Firms involved in closed-ended funds are now trying to do as much marketing as they can before the end of the year, she says.
Owen Lysak, a funds lawyer at City law firm Clifford Chance, agrees that when it comes to marketing to EU-based investors, there remain “a lot of question marks”.
“With a managed account type structure or anything that is a MiFID-type activity, there is a lot of uncertainty about how to do that going forwards and that is worrying to people.”
Lysak says that a document published by the pan-European financial regulator Esma in August – on the issue of letter-box entities having sufficient substance in the EU as well as equivalence – has raised further questions about how delegation will be approached in the EU from next year.
“The letter was a bit unexpected, not only in terms of its timing but also in the range of topics that were covered. It came out of the blue and really came as a bit of a shock: a shot towards the UK that has made people a little bit nervous. It is interesting that Esma is putting that out there as a marker.
“The longer it takes for a regime like equivalency to come into play, the less value it has to UK firms because firms will have started to restructure: they will have spent money and opportunity cost putting in place their plan B or plan C.
“The main worry now is that any deal will arrive so late in the day that firms will have already shifted to their alternative plans anyway, so everybody is having to plan for the worst.
“The UK is trying to navigate a tricky line, wanting on the one hand to attract new money and new capital, while also staying as close to the EU as possible should something like an equivalency regime become available.”
Some senior industry figures in the UK – including Keith Skeoch, the outgoing chief executive of Standard Life Aberdeen – have thrown their weight behind the idea for a new post-Brexit regulatory regime for UK funds to attract global business.
But Lysak believes that the UK will have its work cut out going head-to-head with the international success of the EU’s Ucits label – which UK firms will not be able to use from January.
“There is a lot of value in Ucits, which whole platforms have been built around,” he says. “I can’t see that creating a UK regime will be the immediate priority, which is much more about what the country’s relationship with the EU is going to be.”
© 2020 funds europe