Paris looks to profit from London’s Brexit own goal

Asset managers, struggling with digitisation, cost pressures and a perennially disgruntled client base, are now wrestling with another variable, over which they have even less control.

At the recent Fund Forum in Berlin, the investment industry’s annual showcase, much of the talk in the backrooms – if not on the conference stages – was about Brexit, and its far-reaching effect on international fund houses, many of which have a London base.

An unusually subdued Peter De Proft, director general of Efama, the European Fund and Asset Management Association, was preparing to set up a special “task force” to address the implications of Brexit on the industry. Dismayed by the emergence of new, politically-dictated trade barriers, he is a passionate defender of Europe’s young, highly mobile workers, who need pan-European savings products to plan for retirement.

“Our younger generations are all studying and working abroad. They just take a backpack with them and go to live in another European country,” he says. “They are so used to that freedom of movement and it must also apply to financial products.”

Most major investment firms will do everything they can to preserve their ability to sell across borders, aware that this will mean shifting staff around European capitals, with London likely to be the biggest loser. State Street Global Advisors is looking to boost its EU firepower through Dublin if the UK government’s negotiations fail to deliver access to the single market for financial services. “We are planning for a range of outcomes, including the most extreme ones we can think of,” says Rick Lacaille, global chief investment officer at SSgA, responsible for assets of $2.5tn.

Upgrading Dublin, already an investment hub for traditional equity, fixed income and asset allocation strategies, is the logical step. Dublin also features in the plans of Principal Global Investors, which may gradually relocate some of its 140 London-based staff to the Irish capital. The company is already moving in this direction and a harder Brexit would likely accelerate this, relocating governance and risk management roles. 

In the event that the EU forbids European asset managers to delegate management of assets to non-EU territories, then London will be hit much harder, says Nick Lyster, CEO of Principal’s non-US business and a regular speaker at Fund Forum. “We are planning for a hard Brexit, then hopefully there will be no surprises,” he says. 

Privately, pan-European asset managers say the UK pensions market is a vital one, representing the size of Germany, France and Spain combined, making it essential for them to forcefully put their case to British and EU policymakers.

A director of one of Europe’s top five firms admitted they would have to “rewire” their entire European operations. “The problem is that nobody knows what will happen. A two-year transition period for the industry would be vital. A lot of people would like to see this in financial services and elsewhere.”

Brexit has clearly added an extra layer of uncertainty to an industry in transition, with the latest UK general election result only amplifying concerns. 

“The UK government is going into the negotiating room without any well thought-out plan,” says Amin Rajan, CEO of investment think-tank Create-Research and an adviser to businesses and political leaders. “Anything is possible, with a high probability that it might go wrong. So scenario planning, however advisable, is not very helpful amid current uncertainty.”

FRENCH CONNECTION

Paris is beginning to capitalise on the UK’s self-inflicted wound, especially since the election of finance-friendly former banker Emmanuel Macron as president. UK prime minister Theresa May’s high profile visit to Paris appears little more than a much-needed photo-opportunity for a beleaguered politician trying to associate herself with one of Europe’s rising stars.

There will be little incentive for French financiers, for so long having to play second fiddle to London, to maintain an Entente Cordiale now that the ball is firmly in the French court.

Previously seen as a highly unionised, malcontent faction, holed-up in the unsightly, concrete wind-tunnel of La Défense on the Parisian margins, the €3.8tn ($4.3tn) quant-flavoured French asset management industry is at last starting to sing its own praises. Among its 635 firms, are big players Amundi, BNP Paribas and Axa, and more fashionable arrivals Carmignac.

“France is not in the hands of investment consultants like the institutional markets of the UK and US,” says Jean-Louis Laurens, Ambassador for French Asset Management at Paris Europlace, and a former colleague of Mr Macron at Rothschild. 

“Consultants are the enemy of innovation. France has innovated more due to our mathematical tradition and focus.”

With a UK trade deal looking increasingly unlikely during the scheduled timetable, London’s asset managers will need an EU base from which to manage and distribute funds, or lose access to the market, he says. “With our depth, talent and innovation, Paris is the place you cannot avoid. Luxembourg will not give you talent or innovation. Frankfurt is not an asset management, but a banking location. Dublin, with due respect, is not a big enough place to be an EU finance hub.”

The Parisian plan is to attract portfolio managers and research staff away from London, offering attractive incentives, with 30 per cent of research expenses tax deductible. They will be targeting the approximately Ä1tn managed in London for European investors, almost half of this invested for French firms. Mr Laurens also stresses the much-derided La Défense is no longer the epicentre of French finance, which has shifted to the much more attractive arrondissements of the old city.

The only silver lining for London, believes Create’s Mr Rajan, is provided by the unexpected June general election result, raising the possibility of a soft Brexit or a second referendum. 

“This leaves us less pessimistic than before,” he adds. “But Brexit remains the biggest ever own goal for the UK economy.”