Every New Year offers much to look forward to and 2017 is no exception. Some may look forward to it with relish, some with reservations and some with trepidation. For all, this time, it should be an exciting ride.
The most obvious and most controversial aspect of the year will be the Brexit process. Assuming, as we do, that the Supreme Court insists that Parliament is given a role to play in firing the starting gun, we could see political histrionics emerge early on. With Commons agreement already in place for Article 50 in March, it is fair to assume that whatever votes the Court requires will be explicit Confidence motions. A significant blockage in Parliament, whether in the Commons or Lords, will precipitate a general election. The government has little to fear from the Opposition in its current state and will firmly expect to increase its majority. Whatever resistance the House of Lords may have offered beforehand, it will not persist after an election win for Teresa May. While we expect Article 50 in March, any delay seems unlikely to persist beyond the summer.
And if Article 50 seems fraught, it will be little more than character-building training for the real contest. We cannot predict the outcome of negotiations, but we can assess our dependence on passports, whether UCITS, MiFID, AIFMD or something more exotic. Many will find that passports have been exploited rather less than expected and that the disruption caused by their assumed disappearance is not the trauma that some predict. But for those for whom the passport is a key feature of business life, alternative arrangements will be required. We do not expect mass departures from the City, however the FT might extrapolate from enquiries made to Irish regulators. Sanguine as we have been throughout, the determination we have met across the City has been striking. It seems that Dublin, and even Frankfurt, is a little less attractive than some would have us believe. Unlike armies, which spend much of their time preparing for the previous war, the City is forward looking.
While undoubtedly too early for grand decisions, firms will plan for the most problematic yet probable outcome. They will assume no Single Market access and, that way, will not be disappointed. They will expect the European Commission to play hard-ball over ‘equivalence’. They will be confident that the intended transition will consist of rolling over all EU regulations into UK requirements, with rationalisation deferred to 2020 and beyond. And they will know that a Europe of motor manufacturers and wine growers will not, in the end, refuse to trade with the world’s fifth-largest economy.
And we also know that Brexit will not save us from MiFID II. What started as a tidying up exercise, has grown into an ogre, whose life purpose is, as becomes the species, to frighten the unprepared. For most, the real challenge lies in the need to adapt to new means of payment for research. We are not recommending Research Payment Accounts – we believe there is a better way. If clients expect to have to make additional contributions to pay for research and know that they will pay less for execution than hitherto, they will not regret being spared the cost of the admin burden that RPAs will invoke. The demand for transparency may well become more pressing; if so, a firm that is truly client focused will design a regime that reflects that demand, without the excess-baggage label that is so clearly attached to the RPA.
And should we expect life-changing injuries from the Asset Management Market Study? For some the threat could be real and possibly justified. Closet trackers will be taken to task before long – active management fees will have to be justified, not just by process but by results. The Regulator is determined to expose poor value for money and may yet develop its own published rankings of the industry it regulates. Evaluation of value will be the area of attention where industry input will matter most.
But the Study also reveals the Regulator’s ceaseless concern with conflicts of interest in the world of investment funds. The theory of the chain of authority from trustee to authorised fund manager to portfolio manager is belied by the reality of the commercial reversal through the chain of appointment. Those with long memories will recollect certain regulators expressing just such concerns a score of years ago. While the UCITS Directive may prevent major re-engineering of fund structures for the time being, a longer view may emerge from a regulator that will be re-empowered by Brexit in the forthcoming decade.
Meanwhile, we expect some tinkering at the margin. Happy New Year.