Last weekend prime minister David Cameron revealed an in/out referendum on the UK’s EU membership would be held on 23 June.
Now the campaigning has started, financial advice firms and other financial services businesses faces an uncertain period, with both sides claiming the other will ruin the economy or wreck havoc with regulation.
Would a Brexit lead to another overhaul of the regulatory regime for IFAs? Is there any reason to modify client investment plans? And what other, less obvious consequences could it have for businesses?
The EU has had a positive impact on firms in certain parts of the country both directly and indirectly. Some advisers have been able to tap into EU funding to help develop their businesses, for example Cornwall-based Jacksons Wealth Management.
The firm received one-off finance under the EU funding scheme Convergence in 2009 which is specifically targeted at the county.
Since then, said Jacksons managing director Pete Matthew, the firm has also benefited from wider EU investment into the region, which has helped make his clients wealthier.
‘Cornwall has benefited massively from EU money,’ he said. ‘We have this amazing infrastructure, like roads and broadband, and continue to do so. If that was no longer there, I dare say there would be a significant knock-on effect for local business.’
The EU has also influenced regulation. Wide-ranging pieces of impending EU legislation, including the Markets in Financial Instruments Directive (Mifid II) and Solvency II, are set to have a significant impact on advisers and providers when they are adopted in the UK.
The Financial Conduct Authority (FCA) will have to decide whether or not to fall in line with them should a Brexit materialise.
Matthew Connell (pictured above), head of regulatory developments at Zurich, said: ‘With Mifid around, the effects on advisers might be different under the FCA. Call-recording requirements and some of the unpopular bits of Mifid might be dropped, like stricter requirements on non-monetary benefits; there might be more room to manoeuvre.’
The FCA is ahead of the game on some of these issues. It has launched several reviews into non-monetary benefits (also known as inducements) over the past few years with a view to a clampdown on potential product bias. However, it considered that its own suggestions may overlap with Mifid so has postponed final policy recommendations until there is greater clarity on the EU front.
Increasing capital adequacy requirements for insurers under Solvency II from January seem in line with FCA-led capital adequacy requirements for personal investment firms due to come into play in June.
UK modus operandi
The UK insurance, investment and advice market already operates differently to the way things are done in other EU member states.
The prevalence of bancassurance (the integration of a bank and insurance company, where the insurer uses the bank to distribute its products) and use of commission on the Continent contrasts with the UK model of an IFA market made up of many small firms charging fees for advice.
‘If we come out of Europe, the FCA would be much more able to tailor regulation in the UK to our system,’ said Kate Smith, regulator strategy manager at Aegon. ‘The FCA picks and chooses already, even if it looks across the Continent to see what the others are doing.’
Even if the UK left the EU, domestic finance firms would still want to do business with remaining member states.
‘A lot of our financial services companies trade with Europe and so if the regulations were dissolved, the starting point for all EU countries with us would be “if you [the UK] want to carry on trading with us, you will have to adopt our standards”,’ said Connell.
Advice firms can establish a presence or carry out permitted activities in the European Economic Area (EEA) using so-called passporting rules. The EEA consists of all EU member states plus Iceland, Liechenstein and Norway.
A firm authorised in an EEA state can offer certain products and services in the UK and other EEA states if it has the relevant passport.
Michael Basi (pictured above), managing director of Essex-based Basi and Basi Financial Planning, wants to develop connections in Europe this year that would allow the firm to offer advice abroad.
He said the potential for a Brexit had not changed his plans to expand onto the Continent.
Whether Brexit would also result in an exit from the EEA is as yet unknown. If the UK left the EEA, it would also follow that EEA-based firms would be unable to passport into the UK.
Ready, steady, go?
The ‘in’ camp has focused on the disruption to markets that could result from a vote to leave. But what can advisers do to prepare?
Phil Billingham, operations director at London-based Perceptive Planning, said: ‘The degree to which markets are affected is important. I would find that difficult to predict, so moving clients around maybe isn’t an option.
‘It could have a massive economic effect and a significant effect on client portfolios … [but] we certainly have no idea how the referendum is going to go. There are so many variables before we get anywhere near looking at portfolios.’
Matthew (pictured above) said advisers should not be making rash decisions about what to do with client assets at this stage.
‘We are getting asked questions by clients, but we are all intrinsically linked as developed markets, so by pulling their money out of the EU and putting it in the UK, they would probably be in the same position,’ he said.
‘The markets would price it in pretty quickly. It wouldn’t be the end of the world and markets would recover.’
Leaving the EU could, however, result in funds leaving the UK. Some funds, for example Luxembourg-domiciled Ucits, are automatically available for sale in the UK using another kind of passport. Leaving the EU would scupper this.
Iain Anderson, executive chairman at public affairs consultancy Cicero, said: ‘When mutual funds asset managers have some options, they are likely to place funds in Luxembourg or Dublin to give them access to pan-European deals.
‘There’s going to be a question as to which EU authorities will accept passporting rights of those funds [back into the UK for sale].’
Much depends on what the FCA would do differently if it did not have to abide by EU directives but, as it has been ahead of the curve already, there is some hope the regulator will stick to its guns.