Blog: Beware more costs for asset managers if Brexit materialises
Brexit has finally started to cause ructions across financial markets after a weekend which saw negotiations about the UK’s future in Europe conclude.
Putting aside the minutiae of the deal itself (and the latest revelation that the deal is not actually legally binding), the news that Boris Johnson has backed the out campaign – putting him in direct conflict with David Cameron – sent sterling tumbling against the US dollar earlier this week. HSBC has subsequently warned there could be more to come, speculating that sterling could fall as much as 20% in the event of a Brexit.
Big business is also panicking, with the chiefs of BT, Marks & Spencer and Vodafone among 36 FTSE 100 bosses who this week signed a letter pledging their desire to stay in the EU.
Not to be outdone, ratings agency Moody’s has also warned that the economic cost to the UK of leaving the EU would outweigh the economic benefits. It said it would consider “reflecting those threats to the UK’s credit standing by assigning a negative outlook to the sovereign’s Aa1 rating following a vote to exit”, according to Fund Strategy.
The asset management community is, as one might expect, keeping a close eye on developments, doing its best to decide the real implications for the industry and the wider economy.
Guy Sears, interim chief executive of the Investment Association, has warned of “massive repercussions” for asset managers wanting to operate in Europe and service existing clients, while the bosses of various fund groups have also aired their concerns.
Meanwhile the UK’s most famous fund manager, Neil Woodford, has taken the debate in a different direction with a timely update.
Utilising the services of Capital Economics, Woodford has presented a series of stats seeking to explain the real ramifications of a Brexit, ultimately drawing the conclusion that Britain’s long-term future – as far as the economy goes – will not hinge on the vote in June.
It is an important point and well made, but the real dangers here for asset managers are about cost and market volatility, not the wider economy.
As the falls for sterling this week are showing, markets hate uncertainty. A Brexit would be a huge unknown for fund managers in terms of cost, with regulatory upheaval, passporting of funds, and a whole range of other issues all thrown up in the air.
Simply put, an exit would be a headache and could cost millions of pounds in compliance fees as asset managers make sure the many i’s and t’s within any new rules and regulations are dotted and crossed.
Back in January Financial News highlighted the cost issue, quoting a research note by Morgan Stanley whose team of analysts said fund managers would be caught in the eye of the storm if the Brexit materialised.
It could also lead to fund groups exiting the UK if the cost of doing business with Europe spikes.
That, we can all agree, really is worth voting against, especially when the benefits of a Brexit remain unclear.