The implications of Brexit for international private investors and UK wealth management need to be considered from two perspectives: How do we ensure that the UK remains an attractive destination for businesses, family offices and high net worth individuals to invest and do business? And, how do we maintain and improve the position of the UK wealth management sector when outside of the EU?
In the short term, investors should keep their heads and remember that turbulence on the financial markets is reflecting emotions not asset values. Family funds and offices blessed with sound long-term investment strategies should not be blown off course by these choppy waters. The products and services that were considered a sound investment a few months ago have not changed their own fundamental characteristics, but they will be affected by market conditions so a watchful eye will be required.
Financial services businesses based in the UK who face the possibility that they may lose their ability to passport funds and services if and when the UK leaves the EU should consider whether to establish a subsidiary on the continent and use this time to investigate outsourcing partners and technology providers.
Companies should meet with their advisers and review the inventory of their products, services and investments to identify those which may be affected with a view to drawing up a plan once a clear picture starts to emerge regarding the future environment.
It would make sense also to use the fact that the European Securities and Markets Authority has said that it sees no obstacles to granting the extension of the EEA Marketing Passport under the Alternative Investment Fund Manager's Directive to UK crown dependencies Jersey and Guernsey in considering structuring plans.
Jobs in traditional banks have been declining for some time and will continue to. The global banks are constantly looking at restructuring and relocation strategies as a means to save costs. Just a couple of months ago in April 2016, Deutsche Bank announced that it would be consolidating its operational systems to save EUR 800 million in running costs and had closed 43 branches in Spain and Poland. In May, HSBC started to lay off 840 IT staff in the UK as jobs were outsourced to India, China and Poland.
Meanwhile, the Fintech sector is booming with London accounting for more than half of all the fintech funding in Europe in 2015.1 The UK Government needs to continue to support and encourage this sector, which will provide the employment opportunities for the young people who may feel that their future prospects have been curtailed.
The government will need to review each of the EU financial regulations over the next couple of years as they negotiate the UK's exit from the EU. Rather than a piecemeal approach, this provides an opportunity for the Government to develop a holistic strategy for financial regulation which can provide some guiding principles for the negotiators. With the right approach, we could ensure that the UK has a more streamlined and efficient regulatory environment which would provide us with further competitive advantage.
While the government may not be in a position to announce the result of its EU negotiations for some time, they should be able to debate and announce domestic policies which consolidate the UK's position as a financial centre. For example, if all EU nationals working in the UK at the moment will be welcome to stay then there should be no delay in announcing this.
As one government team negotiates with the EU, another team needs to be developing the future agenda for financial services regulation under the new regime. What should the priorities be for the UK going forward?
Possible areas for consultation by the government could be:
- Protection for private investors – private capital is becoming an increasingly important source of finance for private companies and real estate development. However, the regulatory regime for non-retail private capital investors is still essentially 'buyer beware' which may not be appropriate where there is information asymmetry between the parties and, accordingly, protection for private investors can be inadequate.
- Family offices – many family offices are now quasi-institutional organisations as they co-invest and syndicate opportunities. There is an opportunity to simplify the regulatory regime for family offices who are able to act innovatively and, accordingly, don't fit within the tight exemptions. Similarly, an opportunity exists to simplify the private placement rules and to assist individuals who help companies raise funds on a private placement basis.
- Cost-effective redress and recourse for investors who have found that companies raising capital have not used investor funds appropriately.
- Special immigration rules for high level skills in financial services and financial technology.
George Osborne's strategy of positioning the UK as a financially attractive location for inward investment has not been diminished and will be enhanced if plans to lower corporation tax can be delivered. One of the EU proposals which the UK has resisted for some time is that of a new tax on bonuses. If the EU proceeds to introduce such a tax in the future, then the move would give the UK another direct advantage.
The weight of regulation on the financial services sector is immense, but it is important to remember that each piece of new legislation was brought in to provide much-needed protection. Those of us that work internationally are used to dealing with several layers of regulation and working with complex structures across multiple jurisdictions.
1 KPMG & CB
https://assets.kpmg.com/content/dam/kpmg/pdf/2016/05/the-pulse-of-fintech.pdf (most up to date)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.