Just another disruptor: Opportunity and challenges of Brexit for asset and wealth managers

By Mark Pugh

Once again asset and wealth managers demonstrated their capacity to be beacons of calm and measured resilience throughout the recent political and financial market turmoil.

The initial challenges amid the heightened market volatility have been pricing and investor reassurance. The Asset and Wealth Management (AWM) sector has shown itself to be well-prepared, but the longer term implications of withdrawal from the EU remain uncertain. The scale of the unanswered questions facing our AWM clients is reflected in the fact that more than 3,000 industry professionals logged into our EU referendum: What’s next for FS? webcast a week after the result.

Rather than an isolated issue, Brexit is better seen as the latest in a long list of disruptors reshaping the sector, in areas ranging from regulatory upheaval to the move towards digital advice models. And, like all forms of disruption, the UK’s withdrawal from the EU creates uncertainty and challenges on the one side, but also opportunities for innovation and competitive differentiation on the other.

So where do we go from here? Nothing much will change overnight. We’ll continue to be part of the EU and its single market for at least two years, and possibly longer still depending on the process and relationship we ultimately agree. One of the main questions I have been asked understandably involves MiFID II and other upcoming regulatory changes - will they still apply? The most likely answer is yes. EU rules, and the principles that underlie them, will form an important element of either access to the single market or regulatory equivalence outside it, depending on what trading model is eventually agreed. The bigger challenge is how to influence future changes in EU regulation as the UK will no longer have a seat at the decision making table.

Access to EU markets

Passporting and access to EU markets is a key area under negotiation. A variety of post-Brexit scenarios, ranging from the Norwegian EEA model to a series of bilateral agreements, could all be on the table. But it will be some time before the foundations for agreement emerge or the details are finalised.

In the absence of passporting, asset managers could look to take advantage of the third country access rules under MiFID II. Other alternatives include distributing products and services from within the EU. Many asset managers already have the necessary infrastructure in place, having set up operations in Dublin, Luxembourg and other centres within the EU. In the absence of such a presence, it will be important to look at what relocation or restructuring might be needed to sustain access to clients within the EU.

Questions over location in the post-Brexit environment should look at all aspects of distribution and operational design. This includes the impact of technology, emerging market opportunities and changing customer expectations, as well as EU withdrawal. Whatever happens, however, the UK will remain a major centre of asset management – it would take decades to replicate the expertise, legal certainty and trading infrastructure.

Coming through stronger

So what can your business do now to prepare for the changes ahead?

  1. Carry out a full impact analysis to judge what the different post-Brexit scenarios mean for your business. What passports does your business currently utilise, what pan European distribution/fund management do you undertake and from where?

  2. Keep track of political developments, judge the most desirable scenario for your business and seek to influence the outcome, both through lobbying the UK government and communicating with EU governments via operating arms and EU industry associations such as the UK Investment Association.

  3. Look for the opportunities and use Brexit as a catalyst for modernising the structure and operations of your business.

  4. Recognise that this is an enterprise-wide issue, with deep implications for areas such as HR, tax and outsourced services, as well as the board-led strategy.

  5. Reassure employees by explaining how the different Brexit scenarios and your strategies for addressing will affect them. Failure to communicate will create a vacuum of uncertainty, which could spur key talent to seek out opportunities elsewhere.

For more information about the outcome of the EU referendum please visit our dedicated EU referendum hub website, which includes links to other content and webcasts.

Mark Pugh leads PwC’s asset and wealth management team in the UK.

 

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