Brexit and ‘passports’: mapping the landscape

Brexit and ‘passports’: mapping the landscape

Firms around Europe and beyond are living with the immediate impact on capital markets

Director, Investment Management, Regulatory Change

KPMG in the UK


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Brexit will have a global impact. Firms around Europe and beyond have been living with the immediate impact on the capital markets, seeking to continue to achieve the best possible returns and best execution for clients in volatile markets. For some open-ended funds, liquidity management has been in sharp focus. Firms have also needed to communicate effectively with clients and to reassure staff. With potential changes to the free movement of people, Brexit could have a real impact on one of firms' key assets - their people. We are seeing a different pace to how people are responding to Brexit; for UK Firms, the FCA has already confirmed that they must continue to implement new EU rules, like MiFID II.

These things are likely to remain paramount for some time to come. However, firms – around the globe – are turning their attention to what the UK being a ‘third country’ will mean for them, their clients, their choice of suppliers and counterparties, and potentially the assets in which they invest their clients’ portfolios. The term ‘passport’ is frequently used but can be misunderstood. There are lots of them and each one is actually the right to provide a specific service cross border around Europe, provided one complies with a specific set of rules. Now is the time to map current business operations and commercial relationships against the loss of or changes to those rights, for business done both out of and into the UK. Unless other factors are pushing firms into taking concrete business decisions, it is a time to prioritise detailed analysis and planning over immediate action.  

Factors for the sector to consider will include:

  • Where are our funds, our Management Companies, our Investment Management entities?
  • In which asset types and jurisdictions are our funds and clients invested?
  • Of what types are our clients, from which jurisdictions, and are any subject to regulatory or self-imposed restrictions on their portfolios or choice of manager?
  • Which brokers and trading venues do we use?
  • Where and to whom are functions delegated?
  • Which depositaries and custodians do our clients use?
  • With which national regulators do we need or wish to talk?
  • What are the corporate, fund and investor tax implications of potential changes to our business operations?

Firms should be assessing what optionality they already have and how they might create more if necessary. They also need to factor in how long it might take to gain the necessary regulatory approvals for any changes during a time in which many other firms will also be seeking such approvals.
Of course, the big unknown is what the exit agreement will look like. The path to finalising such a complex trade agreement will be neither short nor linear. Reported positions and counter-positions will likely be more numerous than the number of meetings of the negotiating teams, and the final result could look very different to commentators’ predictions. This makes it all the more important for firms to undertake a comprehensive mapping exercise now, so that they can act swiftly when necessary. The mapping will also help to inform and reassure clients that firms have well-thought through contingency plans that can be adapted to any trade outcome.

And the day that the UK exits from the EU will not be the end of the road. The UK may need to secure third country ‘equivalence’ judgements against all the pieces of EU legislation that require such. It will need to negotiate new trade agreements with non-EEA countries where it currently benefits from EU agreements with those countries. And then there is the small matter of restructuring UK laws, which after more than 40 years are inextricably inter-linked with EU legislation and rules.

Unless and until UK rules are changed in substance rather than structure – which will be a long way ahead and will be constrained if any form of open trade with the EU is to continue – UK firms must continue to comply with existing EU legislation and rules and to implement new ones.

Critical questions for firms to address

  1. How well are we managing clients’ portfolios in volatile markets?
  2. How effectively are we communicating with clients and investors?
  3. How are we reassuring EU ex-UK staff working in the UK and vice versa?
  4. Have we initiated a comprehensive assessment of our business options against a loss of rights to do business into and out of the UK?
  5. Have we established a suitable governance structure to oversee these questions and analysis?

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