Spooked fund managers look at rivals to London
Politicians in Westminster and Brussels are not the only ones furiously drawing up plans for the UK’s post-Brexit relationship with Europe. Across the City of London and financial centres around the world, asset management bosses are carefully considering how to restructure their operations to cope with Brexit disruption.
A stark warning from the European Commission this month has added a sense of urgency to those plans. It made clear that from next April UK fund managers would be locked out of selling products into the EU and so-called delegation arrangements, where fund companies outsource activities such as portfolio management to other countries, were threatened.
Executives of UK asset managers and international companies that use London as an entrepot to the rest of Europe are busy deciding where to set up or bulk up EU bases.
“Everybody is in discussions,” says Owen Lysak, a partner at Clifford Chance, the law firm. He says most companies have held off making big decisions while negotiations are under way between the UK and EU. But with the clock ticking and the nature of transition arrangements still unclear, companies will soon have to firm up their plans.
Here we look at the leading contenders to pick up business after Brexit.
Dublin
Ireland’s close ties to the UK — not least its common language and timezone, as well as its comparable legal system and culture — give it a significant edge. But arguably its biggest advantage is the fact that so many funds managed in the UK are already domiciled in Dublin. With the value of funds based in the country rising from €363bn in 2003 to €2.4tn, Ireland is now the third biggest centre for fund administration globally, after the US and Luxembourg.
Mr Lysak says for most asset managers the decision about where to build up their presence in the EU comes down to a choice between Dublin and Luxembourg. “A lot of it depends on whether managers have established a presence in either — whether they have a platform, as well as familiarity and experience with the regulator is quite helpful,” he says.
Bermuda-based Fidelity International said last year it would add 250 staff to its Dublin office, and hired Hugh Prendergast from Pioneer Investments as global head of product to be based in the Irish capital. Fidelity has had a base in Dublin since 2000 and manages £240bn globally.
What counts against Dublin is its relatively small size compared with rivals — meaning housing and other services are already stretched — as well as limits on infrastructure and regulatory capacity.
Kirsty Pineger, head of wealth and asset management at Bruin Financial, a recruiter, said one of the big benefits for UK executives of moving to Dublin was the lower cost of private education. “They can have two or three children in school for the price of just one in the UK,” she says.
Bruin is setting up a Dublin office due to the high number of fund companies weighing up hiring in the city. But Ms Pineger says the main downside is the cost of living. “If you drive around Dublin, all the radio news broadcasts tell you is how expensive property is now. People pay extraordinary amounts to live there — and not even in places close to the city centre,” she says. “It compares to the London market.”
Luxembourg
Over the past century, the Grand Duchy of Luxembourg has transformed itself from a quaint medieval backwater, to a steel powerhouse, and into today’s financial services hub with fintech and space mining ambitions. But as Europe’s biggest domicile for funds Luxembourg is expected to be one of the largest recipients of companies relocating staff from the UK.
“After the Brexit vote I got on the first flight to Luxembourg to set up an office,” says Matthew Hudson, chief executive of MJ Hudson, which advises asset managers. He says US managers with funds already domiciled in Luxembourg are looking to hire more in the country.
M&G, the asset management arm of Prudential, the UK insurer, was one of the first to take the plunge. In October 2016 it said it was opening an investment division in Luxembourg and applied to the regulator to launch a fund range aimed at European investors. It said it did not expect to move people from the UK, but planned to hire for new positions.
Though unrelated to the Brexit vote, in July 2016 Luxembourg introduced a reserved alternative investment fund legal structure. This highly flexible arrangement is designed to attract alternative managers, and market analysts say it is already doing its job.
Mr Hudson says another plus for the grand duchy is that it sits at the heart of the EU, is on the doorstep of Belgium, France and Germany, and attracts people from around the world. “Luxembourg is the last place that will turn off the EU lights, and it’s cosmopolitan.”
The financial centre’s small size means there are unlikely to be large relocations of staff into Luxembourg. Traffic and strained infrastructure already put people off. While some are drawn to its rural surroundings and laid back charm, its lack of a thriving city centre is a deterrent for others.
Paris
The most aggressive attempts to lure London’s asset managers have come from France. Its new business-friendly government and finance lobby groups hope to strengthen Paris’s standing as Europe’s second city for asset management. More than €3.6tn is managed in the French capital, which hosts nearly 650 asset managers.
Many in the City of London are suspicious of Brussels plans to grant the Paris-based European Securities and Markets Authority additional powers to clamp down on delegation rules. They see it as part of a wider push to harm London’s position as Europe’s top asset management base and allow Paris to draw in fleeing fund companies.
What Paris offers newcomers is a charming and easily commutable city, packed with culture, shopping and entertainment. Those missing the Tate Modern and the Royal Opera will find sanctuary in the Centre Pompidou and the Opéra national de Paris.
France’s previous attempts to lure international business have often suffered due to its labour laws, which are more favourable to workers than other countries, and its higher tax rates for the rich. New president Emmanuel Macron has pledged to reform these areas to boost France’s appeal to international business.
Frankfurt
Europe’s other main financial hub, Frankfurt, was seen as an early leader in being able to attract business departing London. It hopes to draw in up to 10,000 jobs in the next few years. But so far it has tended to be banks and insurers that have chosen the home of the European Central Bank rather than asset managers.
Those that do opt for Frankfurt will find it easier to access the German-speaking Swiss market, with its glut of wealthy investors. But its retail distribution is not as fully developed as managers would be used to in the US or UK.
Last year Vanguard, the giant US manager with $4.5tn assets under management, launched a European exchange traded fund range in the German city. It plans to open an office in Frankfurt in the next six months and has already hired Sebastian Külps from Oddo Seydler Bank, a local trading house, to run it.
But Vanguard also has many of its funds domiciled in Ireland, without a significant presence in the country, along with offices in Amsterdam, Paris and Zurich. The company is weighing up which office to bulk up.
“One of the things with Brexit we are all looking at is what is going to be the impact for any of our footprints,” says James Norris, managing director of Vanguard’s international operations. “We’ve got a team that’s been evaluating that for the past year.”
For Mr Hudson, Frankfurt offers asset managers very little. “Unless companies are already there then we are not seeing much interest from US, Asian or UK managers,” he says. “It’s not such a big fund management jurisdiction — it does not have service providers and all the bells and whistles you need.”
Best of the rest
While much of the discussion about post-Brexit operations has centred on the traditional finance hubs, a handful of second-tier cities are on the sidelines hoping to pick up business.
Amsterdam’s transport links, its wide use of English and long history as a trading base are all plus points for the Dutch city’s attempts to attract fund companies. It also has a large pensions industry and good links to Nordic retirement systems. But it lacks a strong retail investment market.
Copenhagen is another city that promotes itself as a base to reach the mighty Nordic pension funds, with more than €500bn of assets under management in its own retirement system.
Lobbyists on behalf of Milan have stepped up their efforts to take as many as 1,500 asset management and investment banking jobs from London. The Italian government has introduced a series of reforms to the personal tax code to tempt high-paid foreign workers.
Malta, meanwhile, is attracting some emerging markets funds due to its proximity to Africa and its lower cost of living than elsewhere in the EU.
“However, the interesting bit of this is how few people have considered more esoteric options,” says Jonathan Herbst, global head of financial services at Norton Rose Fulbright, the law firm. “A lot is due to how conservative managers generally are.”
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