Supporters of Brexit have argued that the UK’s financial services industry will be able to operate more freely and successfully without interference from Brussels. But now that we have voted to leave, there are some concerns that Britain’s fund-management industry will be hurt by potential restrictions on selling UK-based funds into Europe.
At the moment, UK financial institutions can access the single market without restriction, as long as they meet certain regulatory standards. However, it is uncertain whether this cross-border selling – known as “passporting” – will remain an option for UK firms once we leave the European Union.
If the UK were to remain a member of the European Economic Area (EEA), it would retain full access to the single market. But it may not be possible for Britain to cherry-pick the aspects of EU membership that it wants – for example, retaining full market access but putting curbs on the rights of European citizens to live here in order to ease domestic concerns over immigration. So there is no certainty that the UK will remain in the EEA and fund managers can’t be sure whether they will still have access to the EU in a few years’ time.
Hence it’s possible that UK fund groups may shift their headquarters to other European centres of fund management, such as Luxembourg or Dublin (many funds managed by UK firms are already technically domiciled in these countries). However, that process would likely be lengthy and expensive (particularly for smaller firms), not to mention disruptive for UK-based staff members.
This means that there is every incentive for UK fund firms to push for an agreement that continues to give them access to other EU countries. Helpfully, fund managers in other EU countries will also be fighting to retain free access between markets, given the size of Britain’s investor base and the amount of EU money currently invested in the UK market, says Dominic Johnson, chief executive of Somerset Capital Management and chairman of think-tank New City Initiative.
Continued access will also be the best outcome for EU-based investors, who need greater choice in the investment products available to them, rather than further limits on what they can buy. Ultimately, “sense will prevail”.