From online shopping to continental haulage, Brexit has already made its mark. But what does Brexit mean for the Irish funds industry? Although many a crystal ball prediction was made in the years between the success of the Leave vote and the final exit on New Year’s Eve 2020, in reality it was difficult to forecast whether Ireland would benefit from the UK leaving the single market.
Will more funds be domiciled here instead of London? Will business move in the opposite direction to access UK investors following its exit from the single market? Will more higher-level value-adding activity be located in Ireland in the future?
The impact is already obvious, notes Martina Kelly, director of funds at the IOB.
“From an IOB perspective we note two impacts in particular: that Brexit has led to new entrants to the Irish market, particularly new fund management companies, and that Brexit led to an increased scrutiny by European bodies over authorisation policies in member states, particularly in the context of substance in relocating financial services firms,” she explains.
All of this leads to demands for additional staff within new and existing fund entities, and has led to requests to IOB to provide additional programmes to train industry personnel. The IOB currently has programmes for new entrants to the industry, such as the Professional Certificate in International Investment Fund Services and for investment fund directors with the Certified Investment Fund Director (CIFD) Programme.
But Kelly says they are also seeing strong support for training which focuses on designated persons (DPs) within fund management companies. “These are the people who have day-to-day responsibility for the managerial functions in accordance with Central Bank of Ireland requirements, and who are effectively the senior leadership team within the fund management entity. In conjunction with Irish Funds and with advice from interested industry leaders, we are working on delivering a programme which delivers good-quality training for DPs and persons who support their activities.”
Conor MacGuinness, global head of onboarding and relationship management with DMS Governance, says that not only have dozens of UK firms established the EU part of their business in Ireland since 2016, the sector is also seeing US firms looking to establish their EU business in Ireland, “when historically they would have defaulted to London”.
Eve Finn, managing director of Legal & General Investment Management (LGIM) Ireland, has first-hand experience of the impact of Brexit: LGIM established its EU hub in Ireland directly as a result of the decision by the UK to leave the EU.
“One of the primary drivers of that, alongside our ambitions in Europe for growth, was Brexit and needing an EU series of authorisations to continue to conduct business and provide investment services and solutions to our clients,” Finn explains. And they are not alone. A quick look at the top 25 asset managers globally shows that the majority of them have chosen Ireland as their preferred jurisdiction. According to Finn, the Irish funds industry has been a “much more significant beneficiary” than our closest competitor, which is Luxembourg.
The robust regulatory environment here gives investors comfort, and thus facilitates a broad investor base, she notes. “It gives them that security that they know that UCITS fund or the AIFMD fund will be run within that regime, which means that investors from Europe and Asia and the Middle East and South America will all have interest in these funds, which provides a real opportunity for growth in the industry.”
Tara Doyle, partner and head of the asset management and investment funds department at Matheson, says the eventual reality of Brexit took nobody in the funds industry by surprise.
“Brexit is an issue the Irish funds industry has been tackling head-on since the referendum result in June 2016. The industry had identified immediately that the UK’s departure from the EU had the potential to significantly reduce the benefit of the UCITS and AIFMD passports for Irish funds. We also identified that Brexit was something of a double-edged sword and that it also presented opportunities for the Irish funds industry to continue to provide solutions for UK-based investment managers looking to access the EU market,” she explains.
Doyle says the Irish industry worked concertedly to preserve the market for Irish funds in the UK and to provide an EU base for management companies and MiFID firms. “That work will continue now the transition period is over and Ireland will have an important role to play in the upcoming AIFMD review, which will have implications for access to the EU market by US, as well as UK, investment managers.”
Ireland remains a centre of excellence for fund domiciliation, and this has grown significantly in the run-up to Brexit, Doyle notes.
“It benefits from access to an EU passport, which facilitates marketing of Irish funds throughout the 27 EU member states and also an international brand which enables Irish funds to be readily sold in jurisdictions like Hong Kong, Singapore and South Africa. Looking at the most recent quarterly statistics, for Q3 2020, you can see that the value of assets in Irish funds was almost double that of those in UK funds and the number of funds domiciled in Ireland was over double that of the number domiciled in UK. When you compare these figures to Q1 2016, before the Brexit referendum, you will see there has been significant relative growth in asset size in Irish funds.”
She adds that it is reasonable to predict that these trends will continue, “albeit that the new challenges Irish funds will face being registered for sale in the UK may result in a flow of UK money out of Irish-domiciled funds and into UK-domiciled funds.”
A major talking point, however, is the firms’ preference to continue the status quo with the UK as much as possible, set against the regulatory requirement for them to have proper substance and control in these Irish entities, adds MacGuinness.
He notes that Ireland has always been a domicile for cross-border EU fund distribution and there will continue to be strong growth in Irish-domiciled funds based on this. “The difference now will be how the UK fits into the picture. The distribution of EU funds into the UK is very much up in the air at the moment. Currently there is a temporary permissions regime, which is a good start, but there is uncertainty on the timing and process for the overseas funds regime [OFR] which is meant to be the long-term solution,” he notes. The expectation is that more international firms will use UK-domiciled funds to access UK investors, particularly if the OFR turns out to be more complicated than expected. “Some UK investors may even prefer this than investing in the EU.”
Overall, the increased activity will lead to increased value-add to the investment management groups concerned, Doyle points out. “In addition, the intersectionality of the increased focus on ESG considerations under the EU Action Plan on Sustainable Finance provides a real opportunity for the Irish industry to be at the forefront of value-added activity to investment management groups seeking to integrate ESG principles into their investment funds,” she explains.