At the time of writing, the outcome of the Brexit negotiations is still wide open: deal, no deal,a people’s vote, another general election are all possibilities in the coming months. With the parliamentary arithmetic for the Prime Minister’s Chequers plan looking increasingly unlikely to add up (and that is before likely further concessions are made to the EU), the future is far from certain.
The UK’s asset management sector has, for years, been a huge success story, generating approximately 1% of the country’s GDP and employing 57,000 people. It is a vital part of the UK economy. With so much uncertainty, UK-based asset managers cannot afford to wait and see what happens and have had no choice but to prepare for the worst-case scenario. For most, this is a no-deal Brexit and the potential loss of EU passporting rights. In order to make themselves ‘Brexit proof’ and ensure continued access to European clients, many organisations have chosen to either set up or expand offices in other EU locations, with a number of cities competing to become the ‘go to’ destination, with Dublin, Frankfurt, Paris and Luxembourg being the main contenders. Of these four, Dublin and Luxembourg have dominated. A recent article in the Financial Times reported that a third of more than 40 asset managers were increasing their presence in one of the two cities.
Last year, according to the regulator CSSF, Luxembourg saw a 10% rise in the number of people working in the investment industry. These came not only from new institutions registering in the country, but also an expansion of companies already based there. Asset managers that have increased their presence in Luxembourg include M&G, MFS, Jupiter Asset Management, Janus Henderson, T Rowe Price and Columbia Threadneedle.
The Republic of Ireland has seen an equally steep increase in the number of asset managers bulking up in the country and assets under management in Ireland are expected to grow to €7trn by 2025, according to a PwC report, up from its current €4trn. Last month saw Ashmore and First State announce plans to open offices in Dublin. This follows on the heels of Barings Asset Management, who are also creating an office in the Irish capital, as well as Morgan Stanley, who announced earlier in the year that it was moving its European investment division from London to Dublin. Other asset managers to move to Ireland include Legal & General Investment Management, Legg Mason, Standard Life Aberdeen and State Street Global Advisors.
WHAT DOES THIS MEAN FOR LEGAL DEPARTMENTS?
With firms setting up in Ireland and Luxembourg keen to show that they are making a genuine commitment to the country, rather than being seen to create ‘letterbox entities’, the thinking is that an office of 20-50 people is necessary to demonstrate that commitment. As it stands, in the Republic of Ireland, there is no regulatory requirement by the Central Bank of Ireland to have a lawyer on the ground, however, as one global general counsel (GC) told me recently, it is becoming clear that the bank prefers one. In recent weeks, I have spoken with the GCs of five large multinational asset management firms based in the UK. Each one has told me that they are looking to build out their legal team either in Ireland or Luxembourg. For them, it is important to get ahead of the curve and ensure that they are in a secure position no matter what the outcome of Brexit.
The plan for most is to build their teams out slowly, with many taking the decision to hire one or two lawyers to get set up on the ground and then, through a process of natural attrition, add to the team by waiting for people to leave in London and then replacing those roles in Dublin or Luxembourg. No-one is expecting armies of lawyers to start crossing the English Channel and Irish Sea. This will enable GCs to put in place a solid foundation in Dublin or Luxembourg, while giving themselves time to see how Brexit negotiations, and the after effects, develop before committing further resources.
WHAT ABOUT THE UK?
In spite of the uncertainty surrounding the UK’s exit from the European Union, the asset management sector in Great Britain is continuing to thrive, with a record £9.1trn worth of assets now being managed within the UK, a 12% increase in the last 12 months. Over a third, £3.1trn, is being managed for overseas clients, with approximately half of this from the European Economic Area.
The majority of lawyers I speak with feel that there will be at least some sort of short-term negative impact on the asset management sector in the UK, regardless of what type of Brexit takes place. However, there is still an air of optimism around, particularly when it comes to the impact on the legal industry. This does seem to be borne out by the level of recruitment activity continuing to taking place in the UK, with legal hiring within asset management firms buoyant. Law firms too, particularly the US firms, are still investing heavily in talent in London. Indeed for law firms, Brexit is providing further work both in the UK and across Europe, with a recent Thomson Reuters survey showing that 72% of European law firm respondents are seeing an uptick in pre-Brexit workload, with 46% of UK respondents saying the same.
One reason to remain cautiously upbeat about the UK’s asset management legal industry is the predominance of English law in cross- border financial transactions. While some are concerned about the impact a hard Brexit would have on the enforceability of an English judgment in the EU and vice versa, the majority of lawyers remain extremely confident in English law retaining its dominant position. The reason that English law is chosen will remain the same after Brexit as it was before; namely the quality and agility of English courts.
Also, the UK is fortunate in that it boasts a talent pool that is second to none. As one prominent City funds partner told me, both the quality and sheer quantity of legal talent in the UK is extremely difficult to compete with. The depth of talent in both financial services and the law cannot be currently matched by Paris, Frankfurt or any other EU jurisdiction. Fund managers are likely to want to stay in London, at least for the short term. Law firms are able to commit unparalleled resources to assisting their clients, while in-house legal departments are able to pick the very best people for their teams.
The UK’s position as a world leader in both asset management and the accompanying legal industry looks set to remain for some time to come. There is, however, no room for complacency. It is likely that over the coming months and years we will see a slow but gradual migration of asset management functions, including legal roles, to other European cities, with Dublin and Luxembourg being the most likely destinations. GCs need to be pragmatic and consider having some legal presence on the ground should their firm have expanded their presence in another EU jurisdiction.
This article was originally featured in London Legal Business October/November 2018.