Should EU stay or should EU go now?

The reverberations which followed UK prime minister David Cameron’s visit to the recent summit in Brussels are only now beginning to be felt more broadly beyond the political realm.

In early March, the value of sterling fell against other major currencies. Equally, the FTSE100 has experienced significant volatility with gains of 2.5 per cent on a day following a 1.6 per cent fall.

We are told by the respective campaigns, that a veritable cornucopia of plenty or the pits of despair await us regardless of the outcome. And yet what no one has considered yet is how the world of wealth will change.

The long and short is that regardless of policy issue or area, the coming four months will bring with them uncertainty and very little clarity will emerge for quite some time in the event of a ‘Brexit’.

I have attempted to address some of these issues below.

Regulation: There is a misnomer that extrication from the EU will magically dissolve the UK wealth management and private banking’s regulatory burden. This is not necessarily true. The FCA has shown itself eminently capable of creating its own onerous regulations for the wealth management industry (RDR anyone?). In that context, MiFID II (Europe’s own response to RDR) is actually less demanding than its UK equivalent and as FATCA has shown, being sovereign doesn’t mean you are above the law of other jurisdictions – Switzerland take a bow!

Immigration: At the client level, the existing visa system for non-EU HNW migrants will need to be amended as European HNWs will no longer be able to travel into the UK freely. Unwilling to lose out on revenues, the UK Treasury may insist on extending this tiered visa system. They may even seek to reduce the minimum investible to lure wealthy Europeans across the Channel. With the non-dom status being phased out, the opportunity exists to create a competitive and open immigration system, potentially super-charging the UK as an offshore economic centre. At the adviser level, UK-based firms may struggle to recruit high-calibre European talent, and given the international make-up of some firms’ client books, this could reduce firms’ ability to retain specific client segments from the EU. However, with the visa system needing to be reworked, work-based visas will no doubt be considered as part of the mix as well. 

Wealth creation: This is an area where no one can say for sure what will happen. Trade between the UK and EU may not diminish. It remains to be seen what eventual trade deal is struck between the two parties. In the interim this may impact volumes of trade and potentially drag on revenues and ultimately, profits. As such, UK businesses (and business owners) may see a fall-off in trade with the EU. This could theoretically be replenished by sales to other global markets like the Far East, Africa and Latin America. In that sense it could be a case of plus ça change. 

Currency: Fluctuations in the valuation of sterling could have the immediate effect of impacting investment portfolio valuations amongst clients with currency exposure. Yet as most take hedged positions to mitigate against significant currency movements, damage should be limited. The biggest impact currency fluctuations may have pertain to business and the costs of imports and exports which may see businesses affected both positively and negatively.

Inward investment: Without access to the world’s largest market by virtue of membership, will large global banks wish to open offices in London without being able to access the EU too? This is unknowable, although one bank has already suggested it intends to move jobs to Paris from London in the event of Brexit. The UK has a large domestic wealth market and one which looks set to continue growing at a reasonable rate. With strong domestic competition and most other global banks being American and European, will they discount the allure, power and prestige of the City in favour of say Ireland or Luxembourg as their European headquarters? 

Clients: HNWIs are the most adaptable of individuals. They often face challenging and demanding environments to create wealth and in that sense, Brexit will be seen by many as an opportunity not just a risk. Equally, the uncertainty created around the UK’s relations with other parts of the world, may make some, particularly those whose wealth is built on manufacturing and trading goods, pause while negotiations are held and terms agreed. 

Currently the Daily Telegraph’s polls suggest a tight split, with 54 per cent voting to remain in the EU and 46 per cent wanting to leave.

With EU membership set to be determined by the British public, now is the time for the private wealth management industry to consider how it engages with the debate. Perhaps, this question may be worth posing in a client survey?! In the past, we advocated the industry stands up for HNWs and wealth more generally. Would it not be nice to align our industry behind the views of clients on this important matter?

Either way, regardless of your own view on Britain’s membership of the EU or indeed its impact on the world of wealth, one thing is certain: an uncertain world just got a little bit more uncertain.

James Horrax, senior analyst at wealth management think-tank Scorpio Partnership