Although the result remains unknown and the potential fallout is unclear, the one certainty is that a June 23 referendum will let voters in the U.K. decide whether the country remains in the European Union (“EU”).
Prime Minister David Cameron promised the referendum during the 2015 election campaign, arguing that Britons hadn’t been asked for their opinions on the matter since a 1975 referendum. Since that time, the EU has evolved significantly and gained greater control over day-to-day operations, Cameron said.
The EU’s influence certainly extends into the financial sector, which would face significant, if not unclear, consequences should Britain vote to exit the EU, commonly referred to as “Brexit.” A recent report puts support for Brexit at just under 30% of U.K. businesses, whereas a majority (58%) believe the perks of EU membership — including access to the common marketplace and an expanded supply of potential workers from across the continent — outweigh the negatives.
The stakes are high for the fund management industry, as EU membership offers certain benefits to U.K.-based alternative fund managers.
Specifically, fund managers can avoid regulatory barriers through access to the UCITS “passport,” which allows them to operate and market their funds throughout the EU without seeking authorization to do so in each of the continent’s member states. Similarly, the AIFMD covers those managing non-UCITS funds within the eurozone. Brexit would mean that U.K.-based funds would need to go through lengthy and expensive registration in an EU domicile, such as Luxembourg or Dublin, in order to access the large and lucrative EU market.
As a result, Brexit could prompt some firms to relocate some or all of their operations from the U.K. altogether. London is home to an estimated $6.6 trillion of assets invested by hundreds of fund groups, some of which have already warned that Brexit would likely reduce the U.K.'s financial services and asset management industries. Private equity firms are stepping away from making deals in Europe due to the uncertainty created ahead of the vote, and/or ruling out making any further acquisitions in Britain until the matter has been settled.
Other challenges for fund managers in the event of a “leave” vote include regulatory and legal challenges in the $550 trillion global derivatives market, as well as U.K. banks – and the city in general – no longer being able to access euro financing from the European Central Bank. As a result, a number of payment and settlement systems will have to be modified to reflect the U.K.’s "offshore" status unless negotiations between the U.K. and the EU around the terms of Brexit manage to avoid such consequences.
Regardless of the outcome of Britain’s June 23 referendum, it may only be the beginning of such membership challenges for the EU. According to one recent poll, nearly half of the voters in some of the largest EU member states want to hold a similar vote. Should Britain vote in favor of Brexit, there are worries that Spexit, Irelexit, or even the unthinkable Frexit or Germexit could follow, casting doubt on the future of the common market.