Is this a landing zone I see before me?
We explore some key terms from the Brexit lexicon for asset managers to follow.
When Taoiseach Michéal Martin T.D., the Irish prime minister, visited with his UK equivalent Boris Johnson at Stormont House in Belfast a few weeks ago, a wide range of topics were likely on the agenda, with Brexit undoubtedly close to top of that list. He was quoted afterwards discussing with some degree of optimism the prospect of there being a “landing zone” in sight and “a shared understanding that we don’t need another shock to the economic system that a sub-optimal trade agreement would give alongside of the enormous shock of Covid”.
There is some precedent here, both linguistically and geographically. In October 2019 at Thornton Manor near Liverpool, the previous Irish PM, Leo Varadkar, discussed Brexit (among other things) with Johnson at a meeting that brought us the “pathway”. It is salient to note how pivotal that meeting between the Irish and UK heads of government appears to have been in bringing the previous “cliff-edge” negotiations between the UK and the EU towards an outcome that both parties could sign up to just seven days later at the European Council.
What might a post-Brexit financial services landscape look like?
What can easily be forgotten in all of the furore about the likelihood or otherwise of an EU-UK trade deal emerging between now and the end of this year is that the EU has the power to unilaterally grant access to financial services firms based on whether UK regulations are similar to their own – a process known as “equivalence” – regardless of whether a trade deal is struck or not.
Financial services access after the end of the Brexit transition period has not been a part of the EU-UK free trade deal talks, although most would concur that it is being used as part of the bargaining on both sides. For example, European Commission executive vice president Valdis Dombrovskis warned recently that equivalence could still take months to be granted. “EU member states have still not come to terms with their own regulatory changes for the financial services sector”, he said, suggesting it could take some time post December 2020 for firms to secure market access into and out of the UK.
In the absence of equivalence, each country is permitted, at its own discretion, to decide whether to allow access to another’s financial services firms. This could lead to nations within the EU “going rogue” and agreeing ad hoc structures with the UK – but this would need to be balanced against concerns over the impact this might have on their own access to the financial services common market. Further, the reality of additional complexity for individual firms would surely temper any enthusiasm for a country-by-country regulatory approach.
In fact, it is the view of this author that, despite the warning shots from both sides, in the event of a failure to agree equivalence structures by year-end, whether due to certain EU-wide rules remaining in flux (PRIIPs – we’re looking at you!) or otherwise, this should not lead to a financial services cliff-edge. Rather, it is more likely to result in a rolling short-term status quo period being agreed. The two financial jurisdictions are too closely intertwined to be torn asunder in so short a time. For example, almost half of all debt and equity issuance for non-financial Eurozone firms between 2012 and 2018 came from banks based in London.
Since the referendum result in 2016, financial services firms have been preparing carefully for this day. In Ireland, this is visible from new market entrants and the expansions of existing platforms, and in the changes several asset managers have made to their corporate structures. Since opening the Copylab Dublin office earlier this year, we have met several prospective clients completing a migration from a MiFID to a ManCo / SuperManCo structure, allowing them to not only sell financial services products originated by other offices, but also to now originate their own product from their Irish office. This migration of product origination away from London is likely to continue in the absence of longer-term stability in the EU-UK equivalence arrangements. At Copylab, we stand ready to support our clients and any adaptations they need to make to their business models in the coming months and years ahead.
Stability… Clear to land?
In this Brexit lexicon it would appear that the pathway has now morphed into the landing zone. For stability in the financial markets, one must now hope that this landing zone could soon lead to the “tunnel”, the phrase coined for the period when EU negotiations enter the critical final stages.
Despite the significant headwinds of 2020, we have found our clients to be busier than ever and focused on the quality and clarity of their message as a key component of asset retention. Although the more recent soundbites from Westminster alluding to bending the interpretation of international treaties or hiving off Kent into “La Manche” are startling, both appear to this writer to be extreme positions to soften the blow of the eventual mid-point that one must hope can be found between the parties in the weeks ahead.
And, if I may borrow and shoe-horn a little from Macbeth, following that recent inter-governmental meeting in Belfast we look to our political classes across Europe to bring to market a meaningful and stable agreement – to ensure that those recent pronouncements do not become a “landing zone” of the mind.
If you’d like to hear more about how Copylab can help you out in Ireland, please contact Karl Daly