In the first post I outlined the importance of freedom of movement, mutual recognition of qualifications and non-discrimination between citizens in establishing a single market for services. For services to be sold within the single market, they need to be defined to ensure conformity, which requires a regulatory framework.
It is this regulatory framework which allows financial services firms established and regulated in one country to sell their products throughout the EEA. This is often referred to as passporting.
As mentioned, passporting is not provided by one over-arching set of rules but by different set of EU regulations which are often specific to a particular sector. Today we’ll start our discussion of the impact of Brexit on different financial service sectors, focusing on asset management.
The purpose of asset management
The goal of an asset manager is to create wealth. A client will provide an asset manager with money which is used to buy different assets with the target of increasing that capital.
This money could be invested in equities – shares in companies. By contributing to the capital of a company the shareholder will usually receive regular payments in the form of a dividend.
Or the money could be used to buy bonds – debt which can be issued either by governments or companies. At the end of a defined period, the issuer will pay back the debt. During that period, the issuer will make regular payments to the investor known as coupons.
Asset managers create wealth for their clients by re-investing the income – dividends or coupons – to grow the size of the pot. In other words, they harness the power of compound interest. Share prices can also appreciate over time which will further increase the wealth of the client.
Equities and bonds are the most straightforward investments available to individuals investing into an Individual Savings Account (ISA) or building a personal pension.
If you have an auto-enrolled workplace pension, the salary contributions made by you and your employer are given to an asset manager to create your retirement income by investing in equities and bonds.
Institutional investors, such as pension schemes and insurance companies, will also own equities and bonds and may also invest in more complex assets and strategies such as hedge funds, private debt and commercial property.
Structure of an asset management company
Asset management firms usually offer a range of investment options in equities, bonds and other asset classes.
Each of those options – for example, a global equity fund – will collect the money paid by individuals into an investment fund. A portfolio manager oversees each investment fund determining which assets should be included in the fund, as well as when to sell assets and buy new ones.
These investment funds will be domiciled in a particular country. The marketing department of an asset manager will provide materials explaining the benefits of investing in a fund while the sales force will persuade individuals and institutions to invest.
The importance of the EU to the UK asset management sector
Being a member of the European Union enabled UK asset managers to take advantage of the passporting provided by different regulations to market and sell their investment funds throughout the EEA.
Asset managers sold their products to institutions like pension schemes and insurance companies as well as to individuals.
The industry was successful at building London into a hub for managing European assets. According to the latest annual survey by the Investment Association, the UK had assets under management of £8.5 trillion.
The industry managed £3.6trn for overseas clients and 37% of all assets managed in Europe. Given the UK was just one of 31 members of the EEA, we managed a disproportionate share of total European assets.
As a member of the EEA, a UK-based asset management company could sell funds domiciled in the UK using sales and marketing teams which were also based in the UK. Now we’re outside of the EU, this is no longer possible.
The next two posts will explain the changes asset managers have had to make to continue to access the EEA. They will also examine what future changes could be in store and the potential impact of divergence.