The United Kingdom's decision to leave the European Union will raise questions over the future of regulation for UK-based asset managers, with experts previously warning a Brexit would be 'absolute carnage' for those selling across borders.
Fund groups have been tight-lipped about their contingency plans in the event of a Brexit, partly due to the huge number of unknowns as the UK moves into unchartered waters.
However, what is clear is a huge level of upheaval lies ahead for the sector, especially those groups who do not have an offshore product range.
Shortly after the UK's departure from the EU was announced, the Investment Association noted that despite the rules and regulations governing asset management remaining unchanged for the time being, there are "likely to be challenges ahead".
"How the UK's role in the EU will change will become clearer over time, but there are likely to be challenges ahead and we look forward to helping the Government and our industry to navigate these," it said.
"The Investment Association is confident our industry will be able to continue to compete overseas, both in the EU and the rest of the world."
If we leave the EU, then UCITS products will no longer be UCITS and it will no longer be our right to serve Europe.
Concerns over domicile
This follows comments earlier this year from IA interim chief executive Guy Sears (pictured), who warned a Brexit could be "very, very damaging", especially as UCITS funds, which before the vote could be marketed across Europe regardless of domicile, potentially needing to be re-classified as alternative investment funds.
Sears said: "If we leave the EU, then UCITS products will no longer be UCITS and it will no longer be our right to serve Europe.
"Our right to provide cross-border services would be dependent on the EU. There would be massive disruption to how we organise our business."
A chief concern among UK asset managers will be how a Brexit affects the UK's compliance with the Markets in Financial Instruments Directive II (MiFID II), an EU-wide piece of legislation aimed at improving transparency across EU markets in the wake of the 2008 financial crisis.
Under MiFID II, due to be implemented in January 2018, countries which are not part of the EU who want to sell their products and services in the area must open a branch within EU borders operating in equivalence with European regulatory standards.
FTI Consulting's Financial Services Practice in Brussels said UK asset managers could find themselves with restricted access to the EU single market in the event of a Brexit.
"Should the UK exit the EU, it will be treated as a third country, and for British investment firms wanting to continue to sell investment services or retail products in the EU, British rules would have to be deemed equivalent by the European Commission and the European Securities & Markets Authority (ESMA)," it said.
If one looks at countries such as Norway and Switzerland, who are close to the EU but are not members, they have secured access to the EU market through compliance with its rules.
Through its publications, the Financial Conduct Authority has already acknowledged UK asset managers' problems with the extensive reporting requirements for the dealing and execution of transactions under MiFID II, and its rules around liquidity determinations and positions limits.
Nick Fienberg, director at asset and wealth management consultant Alpha FMC, said the extent to which UK asset managers are affected is dependant on whether the FCA is willing to adopt MiFID II standards in the event of a Brexit.
"If the regulator chooses not to enforce MiFID II across the UK, a question mark will be raised around how UK firms will continue to access European trading venues, which stipulate compliance with MIFID II as a requirement for operation.
"It is unlikely that distributors will promote any funds in Europe that come for a non-MiFID compliant firm, which could curtail the distribution network of some firms significantly. It could be very, very damaging."
Stuart Alexander, chief executive of Gemini Investment Management, said a departure from the EU would be "absolute carnage" for medium-sized and boutique UK-based fund groups without an offshore product range.
In particular, he said they will struggle to sell their products as they no longer have access to the UCITS passport system.
"If you are a purely [UK] domestic-focused business, you will no longer be able to sell your funds into Europe as easily after an exit, which will be absolute carnage for fund groups."
However James Nicholls, partner, risk & compliance at Baringa Partners, said it is unlikely the UK will lose all its influence over EU regulation, even if European bodies begin to deviate further from UK thinking.
"I think the UK has a voice in the regulatory development process as a result of being a member of the EU at present. While that would be diminished if it was to exit, I do not think it would realistically lose the red tape associated with being part of the EU," he said.
"If one looks at countries such as Norway and Switzerland, who are close to the EU but are not members, they have secured access to the EU market through compliance with its rules," he said. "In fact, the rules of the Norwegian market in general are very similar to those in the EU."
In November last year, former MEP Sharon Bowles said the volume of regulation imposed on UK asset managers is unlikely to change following a Brexit, after it was reported that many had supported the 'leave' campaign in the hope it would reduce the £2bn spent by the asset management industry each year to meet European regulations.
She said: "We will still need to be regulated in order to trade with the EU and existing legislation will remain in place. There may be more supervisory discretion than before but this could just as well increase the regulation as decrease it."
It is unlikely that distributors will promote any funds in Europe that come for a non-MiFID compliant firm, which could curtail the distribution network of some firms significantly. It could be very, very damaging.
Market volatility is likely to remain a key concern for asset managers over the coming weeks, with the uncertainty around the UK's departure likely to lead to the further departure of foreign investment and the continued flocking to safe haven assets.
Mark Pugh, UK asset management leader at PwC said the concern for asset managers will be the impact of a continued run of outflows with no market correction.
"Regulators have been focused on liquidity risk for some time and the asset management industry should already have stress tested for this outcome but those who prove unequal to the task can expect scrutiny," he said.
"Communication with clients is crucial as many customers will not know how to respond. Many asset managers have set up dedicated helplines and call centres to provide information to assist investors make informed decisions."