The result of the UK’s referendum has already led to considerable market turbulence with experts predicting more to come. The Brexit vote has presaged a period of sustained uncertainty as we are debating the political, legal and indeed business implications – with little hope for concrete answers in the near-term. Where do we stand by the end of 2016?
For 2016 as a whole, growth now looks likely to average around 2%. UK growth is likely to slow to around 1.2% in 2017 due to the drag on business investment from increased political and economic uncertainty about the UK’s future trading relationships with the EU in the longer term.
Our experts have put together a sector by sector review to see what Brexit means for their industry and what’s in it for Luxembourg:
Asset & Wealth Management
With Brexit, there is much to speculate on UK’s financial services industry. The right to distribute and sell financial products in the European Union for firms based outside the UK might be lost. Any regulated asset manager targeting to freely distribute or sell their products in the EU via passporting is subject to either one or both of the core regulatory regimes: Undertakings for Collective Investments in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD).
The UCITS directive has created powerful investment fund branding, allowing managers to market their funds in all countries that are part of the EU, provided that both the fund and manager are registered within the EU. Post Brexit, an existing UK OEIC and its UK manager would continue to be UK-authorised and their activities would be unaffected in the UK domestic market. However, the fund would cease to qualify for the UCITS marketing passport unless alternative arrangements and new legislation are put in place. Consequently, they would need to be moved into an EU jurisdiction to continue to enjoy UCITS status. Accordingly, asset managers with UCITS funds would have to look to other EU jurisdictions to set-up a Management Company and thereby maintain the UCITS status.
With Brexit, the UK would become a “third country” under the AIFMD. In other words, until the “third country” regime under AIFMD is clarified, UK-based AIFMs would lose the EU marketing passport for their non-EU AIFs. Accordingly, they would currently have to deal with the national private placement regime of any country where they wish to target investors. In such circumstances, UK-based AIFMs wishing to sell their AIFs to European institutional investors would have three options:
- wait until/if the passport is extended to the UK under the third country regime;
- redomicile their AIFM and/or AIFs within the EU, or
- use the national private placement rules (as it will still be available).
Brexit could also be an opportunity for asset managers to re-think their European business models. Both UK and non-UK asset managers currently based in the UK, having product ranges throughout Europe could review their model to become fit for growth in the future by:
- rationalising their product ranges towards one or two financial centres,
- redefining their distribution strategies, or
- creating centres of excellence bringing together experts in one location, for example in risk management.
What’s in it for Luxembourg?
Luxembourg could turn out to be the right location for European and non-European players looking to set-up distribution platforms for both UCITS & non-UCITS in a stable and predictable environment.
What’s more, the country is Europe’s largest fund domicile – holding one-third of European investment funds – and the world’s second largest fund centre after the US with EUR 3,442 bn of Assets under Management. Luxembourg also holds a 65% market share of authorisations for cross-border distribution with funds made available in over 70 countries.
Uncertainty caused by Brexit put the insurance sector into a spin wiping billions off the value of insurers in the days following the referendum. Insurers’ property funds have suffered significantly as fears over the economy, liquidity and commercial property values initially took hold. But what about the longer term?
Brexit raises fundamental issues impacting the future of the sector and in particular how UK players can continue to service EU markets. The nature and extent of this impact are unclear at this time. For a sector practised in risk management, reducing uncertainty and confusion is essential. It’s important that UK insurers find the best ways to service their clients and hence continue to grow.
The impacts of Brexit come on top of an already challenging insurance backdrop, including a “lower for longer” interest rate environment, increasing regulatory burdens and the wide-ranging effect of InsurTech on traditional business models. Uncertainty will be a key theme for some time ahead and insurers are seeking to manage the potential risks and opportunities arising.
What’s in it for Luxembourg?
Luxembourg has long been a leading international insurance centre and a hub to serve EU and world markets. Many international and global insurers choose the country as an access path to EU markets, as do captive insurance entities and reinsurance specialists. Luxembourg has a dedicated regulator for the insurance sector, the Commissariat aux Assurances (CAA).
In addition, a diverse international workforce, including some 7,000 insurance personnel, serves the sector. Moreover, the sector is truly multilingual with English, German and French all freely used by participants including regulators.
At first sight, Brexit is not an opportunity for the European FinTech sector. One of the most important FinTech hubs in the world is negotiating to leave the EU while we are in the process of building the Digital Single Market.
On a positive note, Brexit can provide an opportunity to understand the importance of a strong Digital Single Market and the role FinTech can play. We have already seen very promising initiatives in various EU countries recently, such as the new legal framework to issue mini-bonds on the blockchain technology in France or the regulatory license granted to a bitcoin exchange (Bitstamp) in Luxembourg.
Now, the real question is whether Brexit may hinder the growth of the nascent FinTech industry and ultimately slow down the transformation of the financial sector. We think it is important that FinTechs located in the UK can continue to access the EU market (500+ million customers) to provide services to scale their innovative solutions.
What’s in it for Luxembourg?
Luxembourg should maintain its good relationships with the UK FinTech hub. Luxembourg’s financial sector is complementary to the UK FinTech hub as it provides an ideal testing ground for FinTech solutions at the heart of the EU. Local market players seem to perfectly understand that by embracing financial innovation. The Grand Duchy is on the right path to further strengthen its recognition and reputation among investors, clients and institutional players.
Given its potential, Luxembourg has all the capabilities to stay in the spotlight of the FinTech revolution. So in the long run, Luxembourg should make the most of its expertise in global cross-border transactions and stay at the forefront of financial innovation in Europe and beyond.