Distribution after Brexit

Throughout my career I have always had a compliance or governance focus, therefore writing about distribution activity for investment managers may seem a little strange. One of the benefits of spending time within global asset managers is the exposure to different markets, regimes, and challenges. Two of my favourite programmes of work were ‘The Global Compliance Infrastructure Review’ and the creation of global distribution governance. Essentially, can we compliantly accept our current cashflow by product and entity and are the firms selling our products fit for purpose? This was the beginning of my grey hair…

As I am sitting in sunny Edinburgh, within the UK, the focus on client and revenue preservation, along with a distribution strategy that continues to bear fruit, for UK investment firms must be front and centre. Brexit is looming. Compliant selling through the appropriate entity structure is paramount.

My view, which feels better informed daily, is that there will be a hard Brexit with no equivalence. The FCA have recently (17^th July) reinforced that the Memorandum of Understanding signed into with the ESMA and EU regulators remain relevant. This is an important pre-condition for access by UK fund managers to the National Private Placement Regimes after the Brexit transition period expires on 31^st December 2020.

Larger UK houses will have already enacted their Brexit plans to ensure they are both able to service their existing clients, actively market products and continue to grow revenue streams in the EU27. For the smaller managers with no European presence, I do worry that when the New Year bells chime on 31^st December 2020 and the axe falls on the MiFID passports, then a proactive marketing and distribution strategy into the EU27 will become significantly more difficult, costly and unclear.

So, for the smaller UK managers with no European presence, what is the impact on distribution activity and what should be your key considerations?

• Clients: The client always comes first. You can continue to service clients based in EU27; this is key. Your clients can top-up their investments and continue to hold. Proactive selling will be limited; cross-selling is no longer an option.

• Reverse Solicitation: A personal bugbear and a constant battle between compliance and the distribution function. “Can you please confirm this is reverse solicitation” emails, more than likely a truthful representation of discussion, to the prospect are common and are never a solid foundation when talking to internal audit or the regulator. Each country in EU27 will have a different view of what constitutes reverse solicitation and if this is acceptable. It can be very effective for transactional sales but the opportunity to cross-sell will not be available.

• Marketing: The impact on marketing is more pronounced than may currently be considered. Digital marketing is aligned to the MiFID activity of ‘receipt and transmission of orders’ and may be treated as an investment service. When the MiFID passport is axed, marketing (including your website) must be adapted to suit your permissions. Marketing compliance is key!

• Private Placement: A somewhat carte-blanche approach to marketing and selling across the EU27 will be significantly restricted when the passporting ends. Each jurisdiction operates a National Private Placement Regime, requiring a close knowledge of what the specific jurisdictional requirements are at the outset, as well as ongoing, for both your product and your firm itself.

• Tied agent: The appointment of MiFID regulated introducer within the EU can be a shrewd move. There are excellent firms with solid track records out there to help you provide ‘reception and transmission of orders’ through their MiFID permissions. The impact on revenue is a key consideration, however, as these firms are effective but do come at a cost to your basis point margins.

• EU entity creation: The easiest solution to re-live the complete discretion of free-roaming across the EU27 through MiFID passporting but it does come at a cost… getting the right permanent staff, picking the right jurisdiction, picking the right regulator, ensuring your distribution activity will actually bear fruit… cost v benefit analysis is key.

At Devlin Mambo, we have a Distribution and Brexit working group which is focussing on the impact to distribution activity from both the UK investment managers perspective and non-UK investment managers wishing to distribute within the UK. The working group has representatives from a global product, marketing, distribution, and compliance background. All members have held leading positions in their respective firms.

For more information on how Devlin Mambo can help you, please contact Graeme Devlin (graeme@devlinmambo.com) or your Devlin Mambo relationship contact.