|Imogen Garner:||Hello, and welcome to this Financial Services video. Today, we're going to be talking about Brexit, and specifically, the way asset managers are thinking about Brexit.
Jonathan, what are we seeing asset managers really focusing on in this area?
|Jonathan Herbst:||Two things, really. Firstly, almost all asset managers have a hedge, or will have a hedge in place, by which I mean a legal structure that , to the extent they have European clients, will allow them to sell to those clients. So, that's point number 1. The second point, which is much more subtle, is how they will actually organise the substance of their offering, whether it is a funds offering, or a managed account offering. And I think two or three points to make. The first is, we are seeing, you know, an enthusiasm for the delegation model, lots of issues on that. We can come on to that in a minute. And the second question is in relation to managed accounts in particular, to what extent you can actually replicate a UK offering through various different techniques, whether it's reverse solicitation, double-hatting, or any of the other techniques we're seeing used. So, I think, in substance, significant legal developments, people are putting a hedge in place, but in terms of movement of real people, or substance, much more complicated.|
|Imogen Garner:||I mean, delegation, I think, is absolutely key. There are, really, two sides to the coin in relation to delegation, I think. You've got the whole question of cooperation agreements, and will they be in place sufficiently quickly to facilitate delegation. But you've also got the moves we saw from ESMA last year, and the comments made by Stevenn Maijoor and others in response to those - So some additional scrutiny of delegation models.|
|Jonathan Herbst:||I think that's right. And let's face it, there are two different readings of where certainly ESMA is on this, and whether the opinion was deliberately drafted this way, difficult to say. You know, view number one in the market is actually, substantively, no change from the traditional delegation under AIFMD, or MiFID. You know, i.e. we've had that with Asian managers, and with US managers, so fine, and then there's a much more radical interpretation, which is based on certain paragraphs in the opinion, particularly on the majority of functions, which you know, would view it as much more difficult. And the overlay of that is you also don't just need to focus on the ESMA interpretation, you actually ned to focus on member state competent authorities, what are they actually doing in terms of guidance, and definitely we are seeing differential approaches across the EU, and a degree of arbitrage.|
|Imogen Garner:||It's also been interesting to see commentary in relation to the distinction between advisory models and fully delegated, sub-management models, and ESMA did make some comments about that, and it will be interesting to see how those filter through, in terms of both practice, which is already existing, and some changes that some managers are proposing.|
|Jonathan Herbst:||So, Imogen, what about the question of substance? You know, we've had the sort of rough guidance from ESMA. What do you make of where we're at in the market.|
|Imogen Garner:||I mean, it's really interesting, because again, this is an area where national competent authorities have got quite a bit to say. So, there are some that are taking a much harder line, in relation to what sort of levels of substance are required, and there are others who are a little bit more pragmatic, we've seen for instance, Ireland with CP86, getting a little bit stricter, and we're also expecting something to be published by the CSSF relatively soon. So, it will be very interesting to see where things go on that. I think it's recognised, though, broadly speaking, that nobody wants a series of letterbox entities across the EU, everyone recognises the need for risk management, risk mitigation and so on. The question is, to what degree you go, in relation to all of those.|
|Jonathan Herbst:||One of the other big issues out there is the transitionals. You know, where are we at on that -- is it March 2019, is it the end of 2020 and what are we seeing?|
|Imogen Garner:||Well, what we're seeing is the approach that asset managers are taking, and they're being cautious. They're treating the date as March 2019.|
|Jonathan Herbst:||I think that's right, although, if one took that in its literal sense, people would be doing more, as opposed to creating legal structures, than perhaps they are. So, I think there's a slight mis-match in the market that we're seeing, between the official position and the substance of what people are doing. Clearly, that could change very quickly, depending on the political developments.|
|Imogen Garner:||And I think just before we end, there's one point that we haven't touched on, and that's the whole question of inward passporting, selling funds and selling services into the UK.|
|Jonathan Herbst:||Yes, I mean, I think the issue here is, there's as slightly glib assumption that, you know, that will all be fine, automatically, you know, somehow the UK will carry on with its approach of accepting funds under Section 268, or maybe Section 270, less likely. And also, in terms of the overseas persons exclusion, to the extent you're looking at managed accounts. I think we would certainly put a word of caution on that. You know, that may or may not be the case, but it's important to say there has not been a public statement from the UK authorities to that effect, and it's pretty obvious that in a way worst case, hard Brexit scenario, it's possibly the UK may take a hard line. So, I think all we would say is, in terms of planning, you know, don't make false assumptions in relation to inward, as well as outward.|
|Imogen Garner:||Thank you Jonathan, and thank you for joining us.|