December 2019: Brexit Update

December 11, 2019

As we close out 2019, Robert Mirsky takes a look at where we are in the Brexit process, the December U.K. general election, and what all this means for asset managers in both Great Britain and the U.S.


Dave Plaskow:

Hello and welcome to EisnerAmper's podcast series. We try to dig a little deeper on accounting and finance issues facing business professionals and their clients. Today, we're taking a few minutes to update you on the Brexit situation. I'm your host, Dave Plaskow, and with us to share his expertise is Robert Mirsky, head of EisnerAmper's London office and leader of the firm's asset management group. Robert, welcome and thanks for being here.Robert Mirsky:Hey Dave. Thanks for having me.

DP: So, I know we have a vote coming up soon here in December, on the twelfth, I believe. Where are we at in the process no with Brexit?

RM: So there've been some pretty significant changes to the Brexit deal since we last spoke, Dave. And really importantly within political arenas, as I'm sure you know, former Prime Minister Theresa May stepped down on the 24th of May this year. And Boris Johnson, who was an MP and is also the former Mayor of London, became prime minister on the 24th of July. One of Prime Minister Johnson's campaign lines was to get Brexit done. He continues to use that today.

And so they were moving toward the Brexit drop-dead date of the 31st of October. But it came and went and now have an extended deadline of the 31st of January, 2020. Quite a bit has changed though, along with the Brexit deadline. The Prime Minister's initial plan was to get a deal through Parliament, with a threat of no deal unless Parliament agreed with the plan.

But, in early September, Parliament intervened and passed legislation called the Benn Act, which legally obliged him to request an extension if the deal wasn't agreed upon. Several members of his own party sided against him. They were expelled for that vote. The Prime Minister's next move then was to request that the prorogue parliament for five weeks. Prorogation is parliamentary speak for a recess or a suspension of Parliament. And so no MPs were going to sit and debate the Brexit deal.

And really prorogation, it's a fairly common occurrence in the UK parliamentary calendar, but the duration was significantly longer. The Prime Minister's government was taken to court over this and the Supreme Court in the UK declared that it was unlawful. And on the 24th of September, the MPs resumed business. So following the reconstitution of parliament and with further negotiations with the EU and with members of Parliament on the 22nd, a deal was approved by Parliament in principle.

So while this was a huge step forward for the UK, Parliament rejected the timeline for the deal because they didn't want everything to be pushed forward on the 31st. And they really forced the Prime Minister's hand to delay to the 31st of January, 2020, the Brexit deadline.

So having been frustrated in his attempts to get the deal through, the Prime Minister called for a general election, which is where we are now. And that was agreed to by all the parties and so December the 12th, next week. The Prime Minister is hoping he's going to secure a majority and really a mandate to negotiate from a position of strength on the final terms of Brexit with the EU.
DP:Okay. And what does the new bill look like?
RM: So in the first instance, the UK would leave the customs union, which would mean they could make their own trade deals with other countries. Northern Ireland, though, which was one of the sticking points, would remain in the UK customs territory. But logistically still part of the EU customs union, which would mean no customs checks at the borders.

One of the biggest bones of contention though was an alternative to the controversial backstop. That was the insurance policy that meant the UK had to stay in the EU because of the border between the Republic of Ireland and Northern Ireland if a future trade deal couldn't be agreed. So the alternative idea is essentially to imagine having a border in the Irish Sea, meaning Northern Ireland would be treated differently to mainland Britain. And so in addition to this, the Northern Ireland assembly, known as Stormont, would have the right to vote on this alternative backstop in four years.

So the next big issue then to think about, assuming we've got the backstop, we've got Northern Ireland dealt with, we've got this customs union dealt with, it's the transition period. So the transition period is supposed to end December 2020. The transition periods, the period of time when the withdrawal of agreements have been signed and before the UK actually leaves. And it really in essence creates a standstill where current EU laws and trade deals remain in place between the EU and the UK. But the UK would no longer really have a say in their operation. But what it does is it really allows for an orderly exit for the UK without a drop-dead date where other kinds of agreements could be put in place to replace the EU rules that the UK is currently part of. But what that means is by December next year, we've got another drop-dead date. Even assuming we've got this January 31 Brexit happening.
DP:Okay. And what's coming up?
RM: So as I mentioned before, what's coming up is the December 12th general election in the UK. So all 650 members of parliament are up for reelection. In the UK, elections are usually held every five years under the Fixed Terms Parliament Act. And the UK really wasn't technically due to have one again until 2022, but the Prime Minister again put forward the motion in Parliament for an early election. And Labor was kind of forced to agree to it. Although, their outcome isn't quite as assured as the Conservative’s might be.

So interestingly in this election, the current sentiment is that people have a stronger commitment to either the leave or remain camps than they necessarily do to their own parties. And that's going to be a very strong influence on this upcoming election.
DP:And what will those election results mean?
RM: Well, I mean in the first instance, it means we could have a new Prime Minister 49 days before the Brexit deadline. And that makes things pretty exciting. That said, the Conservatives (or Tories) are currently leading the polls and have been through throughout the election campaign. If they win the election by majority, they've promised they're going to focus on leaving the EU with the January 31 deadline.

Polling, though, is incredibly difficult in the UK, particularly given the emotive nature of the Brexit issues. The issue for the Labor Party here is that Jeremy Corbyn is a relatively unpopular leader according to the polls. He's been called out in recent days for things from ties to terrorist groups to systemic antisemitism in the party. So there's a lot going on there.

The Liberal Democrats, the Lib Dems, are really the third party in the UK elections. And they may throw a monkey wrench into the mix, which could take away key constituencies from both parties. And then finally, Scotland as a country, which voted to remain in the EU after electing its MPs, typically the SNP or the Scottish National Party, they may end up being a swing minority party to give any minority government, assuming that there's a hung parliament coalition partner.

Labor actually said they're going to be renegotiating the Brexit Deal and they're going to put it to a public vote. So contrary to the Conservatives, though, Labor's sort of remaining neutral in terms of their stance.

So if you were going to ask me to predict what was happening, my guess is, which you haven't asked me. But if I were to guess here, I would expect the Tories to win the election. The question is whether or not they win with a majority or whether or not we have a hung Parliament and there needs to be at a coalition government put in place. Certainly the pound hitting a seven-month high versus the dollar yesterday is kind of an indication that the markets at least believe that the conservatives will win a majority in Parliament. And with Boris Johnson promising them a meaningful vote on the Brexit deal before Christmas if he wins a majority, quite a lot's going to happen over the next few weeks.
DP:Okay. So let's bring it back to what you're an expert at and what EisnerAmper is an expert at. What should asset managers be considering both in the US and the UK?
RM: So let me start by saying that I believe the UK will always be a major financial center in the world. And I believe that the impact of Brexit on that will be less negative than originally feared. And, in fact, the countries within the EU, ex UK, are facing a much tougher future in this space if the UK eventually leaves.

We are seeing some fallout throughout the industry. And you look at the suspension of redemptions, for example, from one of the UKs largest property funds yesterday. There's concern around other funds, property funds typically tied to the UK property market given the reduction in property values seen since the Brexit vote. We've seen middle and back-office staff relocating to continental Europe in anticipation of Brexit. But we've seen a few high profile moves of front-office staff moving. And those have predominantly remained in London. And so the other thing you need to think about here in terms of regulation is the continuation of delegation rights after Brexit. Those really have been protected and that enables investment groups to continue to manage funds in Europe from London. There's a question as to what will happen to passporting, which is what asset managers rely on to sell their funds across the EU. And the agreement governing the UK's withdrawal from the EU has very little detail on that point.

So all of that said, let's just talk in a little bit more detail about what fund managers without direct investment exposure anyway in the UK need to be considering. So if we take them as groups and we look at us fund managers in the first instance that are looking to raise money in Europe, they're going continue to be considered third-country funds, third-country fund managers and they're going to need to think about really a few different ways of continuing to interact with Europe. And that's through potentially the establishment of an EU-based fund or the National Private Placement Regimes, sometimes called NPPRs.

My advice to any fund manager looking in the US, looking to raise money in the EU is to take stock of where your fundraising activities likely to take place. Where's the low- hanging fruit? If that's the UK and Switzerland, the Netherlands, Scandinavia. Really the implications of Brexit for you are negligible at this point. In or out, you can still avail yourself of the National Private Placement Regimes or the local Swiss roles to raise money.

If you're fundraising extends to France, to Germany, to Southern Europe, the question becomes much trickier. And there is a tipping point at which you may need to consider alternative routes to market such as the so-called tied agent model. Or depending on the size of the fund manager and funds, establishment of full European operations with appropriate substance. What I see from most US fund managers, say for the very, very large institutional managers, is kind of a wait-and-see approach with sort of a side of National Private Placement Regime and use of what's called reverse solicitation, which is really when an investor calls you, you had nothing to do with it, and they say, "Hi, I'd like to invest in your fund."

Just a note that that the idea of reverse solicitation and the use of reverse solicitation isn't really a strategy and it is potentially risky. There have been some rules in the EU promulgated recently, so there's some changes happening there that will have a big impact on reverse solicitation. So, that's the US situation.

If we look at UK-based fund managers, the question post Brexit is going to be substantially similar to that of US-based managers. The difference here is that the UK might actually be in a slightly more advantageous position, given that its rules around fund management have been modeled on or even developed sort of with the EU rules. So that should, barring some kind of political spitefulness on behalf of the EU, put the UK-based fund managers in at least the position of a US-based fund manager in terms of access to EU investors.

And then finally for EU-based fund managers. Again, barring some political infighting between the UK and the EU post-Brexit, you should be able to continue to access the UK through its National Product Placement Regime. And so my overall advice here is really just to consider a plan of where you're investing, what your investor base looks like, and what your expected future relationship with Europe ex-UK will be on the back of that. I don't believe this is the-sky-is-falling scenario. I believe that a carefully considered and a nuanced approach to the individual markets that you're looking at should allow for a smooth transition for global managers in a post-Brexit world.
DP:Okay. So the saga continues and I'm sure that you and I will talk again on this topic. So thank you, Robert, for your sage advice and your insight.
RM: Thanks, Dave.
DP:And thank you for listening to the EisnerAmper podcast series. Visit for more information on this and a host of other topics, and join us for our next EisnerAmper podcast when we get down to business.

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