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To Brexit, Or Not To Brexit: That Is L’Question – n’est pas?

Published: 6 April, 2016

Brexit is dominating the news agenda at present, with the pros and cons of leaving the EU being looked at from many different angles.

But what would it mean for the financial services sector?

What would it mean for asset managers and hedge funds marketing from the new and glorious liberated United Kingdom?

Here, as I see it, are the main points we need to consider:

Passport Problems

One of the biggest risks to UK regulated firms is the possible loss of the European passport and the single European market in financial services. If the UK leaves the EU and does not remain within the European Economic Area (EEA), withoutsecuring the future of the passport, it could spell trouble.

The passport and single European market gives EEA financial services firms the right to trade freely across the area, often without having to register in or comply with the laws of other EEA member states, or having a physical presence there. The passport also gives these businesses the right to establish one or more branches in any other EEA country.

Effectively it offers a broadly level playing field on which to compete.

All this could be lost in the event of Brexit. Firms that rely heavily on trade within the EEA would be faced with a stark choice – relocate to the EEA, or stay in the UK but operate at a significant competitive disadvantage.

Immigration Implications

Few Brexit conversations get very far without talking about immigration.

What would Brexit mean for immigration policy? No-one can say, but it would be difficult to maintain a liberal immigration policy, as millions will be clamouring for tighter controls.

Immigration constraints would present problems for the financial services industry, as talent acquisition would become harder. Reducing the available workforce would also drive up wages and prices.

Rolling Back Regulations 

The EU’s introduction of the Alternative Investment Fund Marketing Directive has regulated the marketing carried out by hedge funds and asset managers. According to one source, this costs UK hedge funds around £250million each year.

In the event of a Brexit, AIFMD would cease to apply and the UK would be able to impose a lighter regulatory regime – cutting costs and boosting opportunities.

However, UK funds wishing to attract EU investors would either have to use local NPPRs (or rely on reverse solicitation), or wait and hope for the UK to be assessed and approved by ESMA and for the AIFMD passport to be extended here.

 Curtains For UCITS

An EEC invention back in 1985, UCITS has the concept of free trade across the EU at its core.

So, unless specifically provided for by new legislation, UCITS would cease to exist within a post-EU Britain. Any firms wanting to carry on benefitting from UCITS regulations would have to relocate to an EU-member state.


So, overall, what would Brexit mean for the UK financial services sector? Is it a golden opportunity? Or a looming disaster?

My view – as a self-confessed pro-European with a splash of cynicism – is that Brexit would be bad news.

You can’t leave such a large and prosperous trading bloc, after so many years, without causing serious problems.

There are, of course, many within this sector who argue for Brexit. In fact, two of the five richest UK hedge fund billionaires are already linked to EU exit campaigns.

The argument is that leaving the EU would free us from the tough EU rules and regulations that hamper our investment firms and limit opportunities.

Undeniably true, although who knows what future restrictions would be imposed by the UK government? A government led by Jeremy Corbyn, for example, may go far beyond the EU in restricting and regulating financial activity.

Also, Brexit would in one fell swoop limit the European marketing ability of hedge funds and asset managers. The EU would swiftly move to restrict UK firms, taking away the freedom to do business across all EU states without hindrance.

The cost of this would far outweigh the potential benefits of reduced regulation. The EU, for all its faults, is still the best place for us to be.

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