The financial services sector as a whole was broadly, openly and vociferously in the remain camp during the Brexit referendum campaign. Now that the referendum is over, the financial services sector has been very clear about the view that it would prefer a feather-soft Brexit, whatever that takes in terms of negotiation, compromise and financial cost. The issue of clearing and settling Euro transactions was identified some time ago and is still very much on the table, now the issue of the oversight of asset management has reared its head.
Closing the borders around Europe
The issue of intra-EU freedom is the foundation on which the EU rests. It means, among other things, that companies are free to have their headquarters in one country and different departments in other countries from which they could sell their goods and services to residents of all EU members states. It also meant that they can move their staff from A to B as business needs (and the employee’s wishes) dictate. In the asset management world, many companies took advantage of the tax-friendly structures found in places such as the ROI and Luxembourg, while basing their staff in London to take advantage to the huge talent pool found in that city. At current time, this situation would still be permissible under Brexit since the delegation rules allow for delegates to be outside the EU – but rules can be changed.
Esma and the attractions of Paris
Esma is the European security regulator and one of its employees is Sophie Vuarlot-Dignac who joined the organization from the French prudential authority and is now Head of Legal, Convergence and Enforcement. It was in her role as “convergence” head, that she oversaw the publication of an opinion paper, which essential argued that allowing asset management companies to continue to delegate operations outside of the EU was an operational risk and that national regulators should scrutinize delegation activities to ensure that such risk is justified. Taken at face value, this comment does make a fair point. “Out of sight” can be “out of mind” and this can lead to undesirable behaviour on the part of employees. Having said that, in this digitally-connected age, ensuring employees act in an appropriate manner is arguably a matter of good attitude and good policies more than it is one of geography and that being so, it is somewhat difficult to avoid the temptation to connect this suggestion with the fact that Paris is quite openly courting London-based companies.
The practical implications
While London-based asset managers may feel uncomfortable at Esma’s position, it’s important to realise that there is a very big gap between this rather vague suggestion and a ban (or even curtailment) of the practice of delegation. To begin with, if any changes were to be made, they would have to go through the three-way process of the European Commission, the European Council and the European Parliament and it is far from certain that the changes would get the support they need to become law. The fact of the matter is that the ROI and Luxembourg have both done very well out of the current delegation rules and while they (and other EU states) would, in theory, be quite happy to see more of their citizens employed at the UK’s expense, they must also be aware that asset management, by definition, is an area of financial services which caters to high-net-worth individuals who might well be quite happy to put their money in funds managed from the UK if they thought it was worth their while, for example, if the UK followed the example of Singapore and created a very favourable tax regime. In such a case, companies might opt to relocate their bases from the EU to the UK and that would be a painful loss of tax revenue for some countries.