Capital markets union key to post-Brexit financial services sector

The popularity of Irish funds is predominantly due to the openness of the capital markets; funds can be established in Ireland and sold to investors across the European Union under various passporting arrangements. However, with Brexit looming how is the financial service provision in Europe likely to change?

It will have a profound impact on the financial services markets, both in the UK and the EU, says Gayle Bowen, investment funds partner and head of office at Pinsent Masons.

“From the UK’s perspective, managers in the UK will potentially no longer be able to provide services, such as managing or marketing funds in other EU jurisdictions, which they have to date been able to do. As a result of this, a number of UK managers are seeking authorisation in countries such as Ireland to try to retain the ability to provide these services. While Irish funds will retain the ability to sell across the EU under the various passporting regimes, they will lose, post-Brexit, the ability to passport into the UK for sale,” she says.

To address this issue the UK has introduced a new temporary permissions regime which will give EU funds and managers the ability to continue to provide services and market funds into the UK for up to three years following Brexit, which Bowen says has been welcomed by the Irish funds industry and will help to mitigate market disruption following Brexit.

October 2019 is set as the deadline for the key building blocks of Europe’s plan for the further enhancement of European capital markets or capital markets union (CMU), as it is more commonly known, to be in place.

"The completion of CMU has been noted as a 2019 priority area by both industry and regulators alike. Given the concentration of capital markets activities and expertise in London, Brexit has placed an added impetus on the achievement of key facets of CMU before the end of 2019," says Niamh Mulholland, head of asset management regulation at KPMG in Ireland.

Legislative initiatives

In more general terms, since 2015 13 CMU legislative initiatives have been presented by the European Commission, of which three have been agreed by the European Parliament and European Council.

“An initiative of particular importance for the asset-management sector is the commission’s proposal to increase the cross-border distribution of investment funds, which is currently being considered by the European Parliament and council. These proposals seek to improve the transparency of national requirements, focusing on areas where an historical absence of clarity has resulted in ‘gold-plating’ measures, such as the requirement to have a paying agent physically present in a member state where funds are marketed,” she adds.

We are also seeing the emergence of a new European financial services regime, which is looking to evolve following Brexit, Bowen says. Central to this will be the role the European Securities and Markets Authority (ESMA) will play.

“Traditionally, ESMA’s role has been to provide non-binding guidance and opinions. We are seeing ESMA’s role being enhanced and developing more into a decision-maker. With Ireland’s strongest ally now leaving the EU, and Ireland’s relatively small size within the EU, the development of ESMA into a key decision-maker needs to be carefully considered and how it will impact on the future of Irish funds,” she says.

Mulholland says the successful agreement of all proposals should enable the further growth and development of the European investment funds market (which totalled €14.3 trillion in March 2018).

“At the time of publication the commission noted that just over a third [37 per cent] of UCITS funds and around 3 per cent of alternative investment funds [AIFs] were registered for sale in more than three member states and it is hoped that the removal of barriers for all kinds of investment funds by making cross-border distribution simpler, quicker and cheaper will increase competition and give investors more choice and better value while safeguarding a high level of investor protection,” Mulholland says.