Laven Partners have surveyed the expectations of market participants about the effect that the forthcoming British withdrawal from the European Union might have on compliance with financial regulations.

The global law firm received 76 responses from the United Kingdom (42% of respondents), Ireland (8%), Hong Kong (7%), the United States (12%) and a few more countries. The variety of firms that participated ranged from regulatory advisory firms to investment advisers and fund managers.

The survey shows that the initial panic that followed hard on the heels of the referendum seems to have subsided and the financial services industry is now expecting only moderate changes to regulatory life and minor increases to compliance costs, while expecting many new opportunities to arise as a result of the 'leave' vote.

Respondents revealed a strong preference for a relocation to Ireland (64%) - a sign that in nearly a decade Ireland seems to have recovered well from the financial shock of 2008 and avoided "some of the business complexities that have hurt Luxembourg," in Laven's phrase. Other jurisdictions such as Switzerland seem to have fallen out of favour as well.

Many respondents did not anticipate Brexit with excessive foreboding. In fact, the majority of all respondents (61%) actually felt that there would be some or many new opportunities as a result of it.

Less than a quarter of the respondents expected no changes to regulatory life, while nearly two-thirds (65%) predicted moderate changes and only one-quarter expected things to be very different (25%). Many, however, were thinking of moving their regulatory headquarters out of the UK in order to benefit from the 'passporting' regimes of the remaining EU member-states. Although one respondent noted that crowdfunding and peer-to-peer-lending might remain mostly unaffected for retail investors, some expected that dual compliance standards would emerge when the UK finally left the EU, leading to a more onerous regulatory framework for firms based in the UK.

Laven Partners believe that regulatory advisors - like themselves, perhaps - are expecting new opportunities because Brexit might make financial regulation more complex.

Moving after Brexit?

More than half of respondents (perhaps 53%, according to the histogram) said that they were "not considering a move" with respect to moving their activities out of the UK after it left the EU, followed by 30% who were thinking of moving if circumstances dictated.

UK-based fund managers may find it difficult to serve clients in the European Union if they are to lose their passporting rights, which currently allow them to sell funds in 30 countries of the European Economic Area in accordance with the EU’s Undertakings for Collective Investment in Transferable Securities Directive and Alternative Investment Fund Managers Directive. Although moving the manager or activity to another EEA base would be a costly process, Laven Partners believe that some of them might think it a necessary step in their efforts to regain access to the European Union.

Meanwhile, some countries have already begun trying to help firms to move. The Association of the Luxembourg Fund Industry, for example, has set up a dedicated working group to make the jurisdiction more appealing, while the Irish Funds Industry Association has given its existing work groups the task of analysing ways to help it benefit from the UK's departure from the EU. Indeed, 64% of respondents to Laven Partners' survey chose Ireland as their first choice of jurisdiction for relocation. The survey presented respondents with the option to rank jurisdictions. Only 30% of participants voted for Luxembourg as their first choice. When asked for the best alternative to their first choice, respondents chose the Netherlands, followed by Malta. The fund managers also considered France, Germany, Switzerland and the US.

The Norwegian connection

The majority of British MiFID and AIFM firms that took part in the survey are in favour of the kind of deal that Norway has struck with the EU, the details of which have been covered extensively on Compliance Matters in a previous article. Of all respondents, 60% thought that it was important for the UK to remain involved in the complicated tangle of national protectionist measures and countervailing freedoms to which the EU refers as "the single market." The remainder expressed concerns about the terms of a Norwegian-style deal.