The Subtle Effects of Brexit on European Cross-border Distribution 

So far, we concentrated purely on the regulatory implications of Brexit. We discussed at length the changes to the status quo and the alternatives to the loss of passporting rights in Europe. We looked outwards from the UK to Europe, but also inwards with the new regime allowing for European funds to gain access to the UK retail market. Our analysis of the regulation wasn’t only confined to investment fund products, but encompassed recent trends in the market for the offer of investment services.  

A few years in the process, we now have a clear picture of the subtle effects of Brexit on European Cross-border Distribution. The ones that nobody really dared to talk about so far. The ones that have little to do with the changes in the regulatory environment and a lot more with the cultural revolution initiated by Brexit.  

From the irreversible process of intellectual capital migration back to Europe, to the absence of a common communication code across the EU 27, passing through a surprising lack of awareness of the changed dynamics in the relations with Europe, these are some of the invisible hurdles for UK fund managers in succeeding with European cross-border distribution.  

An Issue of Awareness  

Brexit means Brexit. And there will be no attempts to remain within the European Union.  

These were the words allegedly spoken by Theresa May, the soon to be UK Prime Minister at the time. As Brexit day dawned and the UK withdrew from the European Union, for quite some time little to nothing changed in the approach of UK fund managers to European cross-border distribution.  

An issue of [lack of] awareness of the real-life implications that Brexit had on European cross-border distribution carried out from the UK. Lots of talks about equivalence and passporting rights preceded Brexit, yet little thought as to how accessing European markets would have looked like after Brexit day. The same issue of awareness that triggered the highest alert from ESMA and other supervisory authorities in Europe, if the face of UK market participants continuing to carry out their European cross-border distribution affairs out of London. As if Brexit never happened.  

This issue of awareness transcends the mere realm of regulation. It affects the positioning of London and its image alike at the heart of global markets. After years of hegemony and without a true successor in sight, London is no longer the place from which business can be made with Europe. That’s the fact.   

Brits can be excused to a certain extent. If nothing else, after so many years of hegemony in Europe it is a hard acknowledgment to make and a challenging new habit to adopt. The few who embraced full awareness of the new normal, reaped the benefits of revamped old alliances in Europe and made their European cross-border distribution endeavours more kosher in the eyes of authorities.  

We can’t really feel the same about Americans though. We still read nowadays every now and then press releases where American fund managers [innocently] affirm to have chosen London to establish a presence from where to service European investors. This is a recipe for disaster. And we are obviously being polite.  

The Mindset 

Where Brexit means repatriation of intellectual capital and job creation back in Europe, in the old days European desks abounded in London. With that came a particular mindset. One where, in a way, Europe had to adjust to the UK.  

Since the 80’s Italian, French, Spanish and other European professionals wanted to be living and working in London. As part of the experience, they had to learn the British communication code, which goes way beyond the mere ability to speak English with an accent. Conversely, that meant ability for Brits – by just being Brits – to carry out business successfully in Europe. One of the immediate and irreversible effects of Brexit is the relocation of most of these desks back to Europe. For the few European who stayed in London and surroundings, not as many elected London or the UK as their home since Brexit.  

There it comes yet another invisible challenge for UK fund managers. Being able to understand and act in accordance with the various customs and practices en vogue across various countries in Europe.   

This is where a new mindset should come in. One where, notwithstanding the language, adjusting to different practices and customs is necessary to do business with the French, the Germans and the Italians directly in their home countries. Not from London.   

The Beliefs 

Lastly, some old beliefs will have to be shed for UK fund managers to be able to succeed again with European cross-border distribution.  

So far, the reason for the abuse of reverse solicitation, especially in the context of the offer of investment services, was due to this set of old beliefs. That for the UK having been part of Europe, for instance, business in Europe should have been carried out as usual, no matter Brexit. That there were no real alternatives to conducting business across Europe legitimately than the establishment of a European licensed entity. Everything else should have been reverse solicitation.   

Over time though, the evolution of the market for the offer of financial services demonstrated something different. That there was a middle ground where European authorities and UK market participants could both win. Whilst it is not necessary to establish an own entity in Europe, the new successful belief is that the level of legitimacy when carrying out European cross-border distribution becomes a function of the amount of substance made available in a specific member state in Europe.  

That this is the right approach is what seems to be suggested also by the most recent rules on delegation of the marketing function introduced under AIFMD II.   

Out with the old and in with the new.