Laven Partners’ Brexit survey results
The outcome of the UK referendum last month was a shock to many, and it is no surprise that after the shock came a certain feeling of uncertainty. There has been much speculation as to what the future holds for the UK financial industry. We surveyed the expectations of market participants on the potential impact of Brexit, and here is a summary of what different firms predict.
We received 76 responses, spread across out the UK (42% of respondents), Ireland (8%), Hong Kong (7%) and the US (12%) and a few more. The variety of firms that participated spans from regulatory advisory firms to investment advisers and fund managers.
The highlights of the survey are that any initial panic from the referendum seems to have subsided and the industry is currently predicting only moderate changes to regulatory life and minor increases to compliance costs, while expecting many new opportunities to arise as a result of the leave vote.
Respondents revealed a strong preference to relocating to Ireland (64%) showing that in near a decade Ireland is deemed to have recovered well from the financial crisis and avoided some of the business complexities that have hurt Luxembourg. Other jurisdictions such as Switzerland seem to have also fallen out of favour.
Understandably, there has been some negative reactions towards the vote, however, many do not see Brexit as ‘the end’. In fact, the majority of all respondents (61%) actually feel that there will be some or many new opportunities as a result of Brexit.
Looking at the results in more detail, this is what our respondents have said in response to our questions.
Firm Activities
Do you expect your firm’s regulatory life to change much given the results of the Brexit referendum?
Less than a quarter of the respondents expect no changes to regulatory life, whilst the majority (65%), predict moderate changes or things to be very different (25%). A common theme amongst our respondents is the exploration of opportunities to move “regulatory headquarters out of the UK” in order to benefit from the passporting regimes of other EU Member States. Although one respondent noted that crowd funding and peer-to-peer-lending might remain mostly unaffected for retail investors, some respondents expect that dual compliance standards would emerge following the eventual Brexit, leading to a more onerous regulatory framework for firms based in the UK.
If you are an investor, what would you expect to see occur post Brexit?
34% of investors who responded expect some pause in allocations until some more definitive answers are provided as to the status of the UK. This is followed by a similar percentage of respondents anticipating changes to their portfolio allocation during the next six months and most notably a change in the allocation to certain asset classes.
Does your firm expect to see new opportunities arising from Brexit?
40% of all participants in the survey predict positive results from Brexit in terms of new opportunities. An increase in new opportunities is largely expected by those providing regulatory advice to clients due to Brexit potentially breeding complexity in financial regulation. Thus, efficient and pragmatic solutions that address regulatory concerns throughout Europe will be valuable to the industry in order to align existing compliance procedures with any potential new regulations.
Two respondents felt that UK investment managers and fund operators would need to start considering the UK potentially having a third country status post Brexit. Three respondents, however, believed that it is much too early to assess any such potential impact.
Alternative jurisdictions & views on a Norway-style deal
At present, is your firm considering moving any of its activities to an EU jurisdiction post Brexit?
More than 50% of respondents opted for ‘no immediate consideration’ with respect to moving their activities out of the UK post Brexit, followed by 30% considering a potential move depending on the changes that are yet to be announced.
UK-based fund managers may find it difficult to serve European clients if they are to lose their passporting rights, which currently allow them to market across 30 EEA countries under the EU’s UCITS and AIFM directives. Although moving the manager or activity to another EEA base would be a costly process, it may be deemed a necessary step by some as this will allow them to regain access to the EU community.
If a move is being considered, which alternative jurisdiction is currently your most favoured choice?
Following the Brexit vote announcement, some countries have already taken action to assist firms to move, for example the Association of the Luxembourg Fund Industry has set up a dedicated working group aiming to make the jurisdiction more appealing, while the Irish Funds Industry Association has assigned its existing work groups the task of analysing ways to benefit from the UK leave. While various countries are preparing to on-board businesses coming from the UK, respondents seem confident that Ireland would be the best choice, as 64% chose Ireland as their first choice of jurisdiction for potential relocation. The survey presented respondents with the option to rank jurisdictions. Based on the results, Luxembourg was only voted as a first choice by 30% of participants. When asked for the best alternative to their first choice, respondents chose the Netherlands, followed by Malta. Many of the other possible jurisdictions considered by managers include France, Germany, Switzerland and the US.
If you are a UK based AIFM or MiFID firm, would you favour a Norway-style deal above all?
The majority of UK MiFID and AIFM firms, who took part in the survey are in favour of a Norway-style deal, as 60% noted the importance of remaining in the European single market. Those against this (the remaining 40%), expressed concerns about the uncertainty of the ‘deal’ terms if the UK was to adopt this position. Hypothetically, membership of the EEA would permit the UK full access to the single market on the condition of implementing the single market rules. Many respondents argue that remaining in the single market should be the primary focus in negotiations, as this has built the UK’s economic success in recent decades, including increased reach to investors.
Operational, compliance and legal costs
As the results of Brexit are still recent, one can only speculate as to the direct impact in terms of the operational, compliance and legal costs firms may incur. We asked participants about their future expectations and the majority of respondents (83%) feel that there would only be minor to no increases in operational costs, 77% predict a similar situation in terms of compliance and legal costs. Most participants who worried about any large increase in legal, compliance and operational expenses (on average of 17% of all surveyed) foresee the costs coming mainly from higher legal expenses (19%).
It was also interesting to see that some respondents expect a decrease in operational (1.6%) and compliance (3.2%) costs post Brexit, which contrasts with the majority anticipating an average compliance and legal cost increases of 10%, with no change expected in operational costs.
Conclusion
The view amongst the diverse sample of respondents of our survey is that overall not much is expected to change as a result of Brexit. This is good news for business confidence, and the initial panic that followed the vote seems to have slowed down.
For investment managers and advisers in particular, most of the initial anxiety following the referendum results has been presumably mitigated by now as firms can contemplate (or have already have) offerings in other EU jurisdictions.
