24th June 2016
As we know, the UK has decided to leave the EU and, as we digest the commentary on a result which was clearly unexpected, we would like to take the opportunity to reassure clients but also to start exploring areas where there may be benefits for our industry despite the negative reaction by financial markets.
Experience tells us that we don’t think anyone can form a view as to whether we will be better or worse off than we would have been retaining the status quo, but it’s the short term instability that concerns us. We are entering a period of uncertainty and some aspects of what we do may slow down but it doesn’t mean that it’s 100% bad news.
The leave vote does not automatically trigger an exit from the EU. There is a formal process to withdraw from the Union, under Article 50 of the Treaty of European Union which needs to be ratified by the UK Parliament before it is invoked. Once the Article 50 process starts, there is a 2 year deadline to negotiate an exit. This deadline can be extended if agreed by all EU Member States. It is hoped that any exit from the EU will be preceded by negotiations aimed at securing the UK’s deemed equivalence by the European Commission and ESMA in respect of Financial Services Law and the continued reciprocity of free trade as a ‘third party country’.
If granted, this would facilitate continued EU passporting rights to UK AIFMs and AIFs. Any exit from the EU is also likely to provide ‘grandfathering’ exemptions for agreements in place ahead of the exit. As with all EU Law, the AIFMD is enshrined in UK Law and, as such, from a depositary perspective, Langham Hall still has the regulatory permissions in the UK and/or Luxembourg to act as depositary to UK, Luxembourg and non-EU AIFs.
So what we know for sure is that, for the foreseeable future, nothing will change from a regulatory and legislative perspective and we have two years to negotiate with the EU. We suspect there will be a lull in fund raising for certain types of fund until investors know more about the impact to the UK and, for Langham Hall, that may ultimately result in switching some structures to our Luxembourg office. However, it is not inconceivable that international investors will want to take advantage of currency weakness in the UK or make opportunistic investments.
In our European business, we are heavily influenced by UK real estate and private equity transactions however we have been concerned for some time that UK asset prices were potentially overvalued and therefore attention had already turned to countries such as France and Germany. Repricing of assets and currency fluctuation may create more opportunity than a benign environment in terms of investment activity over the next 2 or 3 years.
Furthermore, where we suspect the economy may be in for a bumpy ride over the next year or two, stability isn’t guaranteed in the rest of Europe either as the press is already talking about Frexit this morning (France) and we are guessing other countries will now face similar domestic challenges. This will also present opportunity as well as risk in other countries.
The fundamental benefits of the UK, such as political system, legal framework, language, location and London being Europe’s biggest financial centre, are not going to change. London will be desperate to retain its talented workers from overseas and will negotiate vigorously if there is any risk of them leaving.
In terms of Langham Hall’s European business and impact on its clients, we are fortunate to be located in different jurisdictions, including the Channel Islands and Luxembourg, and are well practiced in needing to reengineer structures to suit our clients whether this related to funds, SPVs or depositary services where we are also licenced in Luxembourg.
Langham Hall has close links to the FCA and industry bodies and we will continue to update you as the political environment and legal timelines become clearer in the coming months.
If you would like to discuss any of these aspects further, please let me know.
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