The upcoming Brexit presents key challenges for UK wealth management companies with regard to investment management, distribution, and talent management. Wealth managers have to decide which products they would use for EU and international distribution as well as the location of the Markets in Financial Instruments Directive (MiFD) distribution firm. The delegation of the portfolio management services for EU funds is another concern. There will also be questions with regard to the strategic implications of the European operating model with regard to future distribution and the management of talent.
In an advisory note to UK wealth managers, Ernst and Young says that wealth managers should be prepared to face challenges with regard to maintaining delegation rights. The UK wealth management industry offers portfolio management services to a wide range of UK and EU investors. A variety of investors including individuals, trusts, and charities delegate the management of their portfolios to experts in UK wealth management firms. EY says that the EU would have difficulty isolating UK wealth managers as delegation rights are currently given to US, Chinese, Latin American, Japanese, Chinese and other firms.
How will funds managed in the UK deal with MFID II? Where are securities going to be stored? What are the entities that have rights to the securities under MFID II? Will London based firms have easy access to Target 2 securities? The May plan was that this problem would be shunted back for some years. We do not know what happens under a no-deal Brexit.” Julian Williams, professor of accounting and finance at Durham University Business School
The EY note says that UK wealth managers need a clear idea of which entities and in what jurisdictions perform portfolio management and advice duties. In addition, UK wealth management companies need to decide how they would provide investment advice out of UK companies and through UK-based relationship managers to EU-based clients. They also need a clear idea of which activities out of the middle and back offices are delegated to which entity and out of which jurisdiction. Certain firms have used UK Open Ended Investment Company (OEIC) as their Undertaking for Collective Investment in Transferable Securities (UCITS) vehicle for distribution to international investors (UCITS) and UCITS by definition have to be EU-based.
EY notes that if Brexit does not create an exception, the UK OEIC funds will become alternative investment funds (AIFs) after Brexit. AIFs are prone to be less attractive to international investors. In order to comply with EU regulations, UK wealth management firms have used UK entities to function in the role of distributors. After Brexit, these firms can be obliged to create EU entities to function in the distributor’s role. The implications of MiFD II, GDPR, and other regulations in the decision making of UK wealth managers will also deserve thoughtful examination. Also the cross-border advice model will have implications with regard to the management of data, cash, and assets.
MFID II is important
Julian Williams, professor of accounting and finance at Durham University Business School told International Finance that regulatory issues are a concern with regard to Brexit for UK wealth managers that have EU clients. “MFID II is important. How will funds managed in the UK deal with MFID II? Where are securities going to be stored? What are the entities that have rights to the securities under MFID II? Will London based firms have easy access to Target 2 securities? The Theresa May plan was that this problem would be shunted back for some years. We do not know what happens under a no-deal Brexit.”
Consider a hypothetical wealth management fund with assets in the high hundreds of millions. This is not going to have separate specific branch offices in Europe, but might have a holding desk in Ireland to process trades under Target 2 securities in the event of hard Brexit. However, under MFID II, for certain trades there is a user disclosure requirement with regard to why you are constructing the investment vehicle. That is, the intention should be explained. “Now for the London-based entity, when there is no exposure under a no-deal, can the EU prevent their holding agent from conducting transactions,” asks Williams.
When MFID II was drafted, the EU worried about Singaporean and American hedge funds operating within the European clearing system through proxies. With London outside the ultimate ECJ jurisdiction, this concern gets exacerbated. UK wealth managers must anticipate a certain reaction such as an ultimate beneficiary disclosure requirement. “Again, this is not a problem for massive institutional funds, but for a hedge fund with an aggressive volatility-led investment strategy, it would either end up being able to work with impunity or it will be shut out,” adds Williams
Williams says that the exact nature of Brexit really matters, as well as the details of the deal and the deals’ impact on fundamental factors. In the current time, wealth managers would find that the outcome is hard to control.
The volatility created by the political uncertainty generated by Brexit might not be an issue of concern to UK wealth management companies, says Williams. “We have not seen much in the way of volatility spillovers and contagion during this time, so this might be over-stated. The majority of UK wealth managers are carefully diversified and operate in a manner that although they are not immune to Brexit, they are still not overly reliant on EU membership to fulfil the objectives. There is also the question of low interest rates – will there be a prolonging of the current trend and a delay in a return to something approaching normality? Clearly the structure of the yield curve matters to wealth managers and this will be impacted by changes in Europe-wide fiscal and monetary policy as the impact (or lack thereof) of Brexit reveals itself.”
From a wealth manager’s point of view, the distribution strategy of UK wealth managers after Brexit will depend on the competitive nature of the company, Mihir Kapadia, CEO of Sun Global which manages portfolios of professional clients, HNWIs, and ultra HNWIs told International Finance. “The distribution strategy will depend mainly on the company’s competitive standing, and this will undoubtedly become the key component to a firm’s success. Therefore wealth managers will need to ensure that they are in the best position possible to take advantage of any opportunities that come their way from Brexit,” says Kapadia.
Access to talent
Access to talent is another key issue for UK wealth managers that EY notes in its Brexit advisory. While the UK is recognised as having the capability to attract top talent from across the world, the question is whether UK wealth managers will be able to attract talent the same way as before after Brexit. At UK wealth management companies, a large part of the staff is typically individuals who are not UK citizens.
Controlling the flow of people into the UK is one of the government’s key concerns, and wealth managers should be wary of the resulting measures. For example, they need to understand what proportion of their workforce will be affected. They also need to understand the flexibility, agility, and preferences of their workforce. UK wealth management firms need a strategy to handle the uncertainty with regard to the foreign origin talent.
“Companies will need to ensure they are well prepared for any outcome in order to soften the blow. This is where firms need to put their employees at the forefront of their thinking. They should take into consideration matters such as identifying which proportion of the workforce will be impacted, whether the company is in place to handle the uncertainty and potential loss of staff as well as identify the flexibility and preferences of its workforce.”
Mihir Kapadia, CEO of Sun Global
Retaining EU talent will be a key concern that UK wealth managers need to tackle with regard to Brexit, says Kapadia of Sun Global. He cites Oxford Economics data which shows that 30 to 40 percent of the employees of wealth managers in London are not UK citizens. “Companies will need to ensure they are well prepared for any outcome in order to soften the blow. This is where firms need to put their employees at the forefront of their thinking. They should take into consideration matters such as identifying which proportion of the workforce will be impacted, whether the company is in place to handle the uncertainty and potential loss of staff as well as identify the flexibility and preferences of its workforce. Taking these into account will be instrumental for a company going forward in what will be a challenging period, but those who are prepared will be better off than those who are not,” adds Kapadia.
Look for domestic talent
Kapadia says that the UK will still have access to a vast domestic talent pool and it is up to companies to ensure they are attractive destinations to work as the competition will be fierce. “By offering something different, they can be attractive to potential employees and this can be done in a number of ways such as graduate schemes or competitive salaries. Although there will be barriers, the industry now needs to take control of innovation more than ever before, and embracing innovation will set the best wealth management firms in the UK apart.”
In the end Brexit is a political issue, politicians will decide the contours of how Brexit impacts various segments of the service sector. Williams says that while regulations are more rigid, in many ways companies do succeed to create elaborate arrangements to circumvent the regulations.
“Services such as wealth management tend to be inherently less sensitive to the resulting political machinations as in terms of the management of assets they operate in a complex multi-jurisdictional landscape. Manufacturing, for example, is far more sensitive to Brexit impacts as physical products are dependent on complex supply chains that rely on relatively frictionless movement within the current EU states,” concludes Williams.