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The fish, the finances and the last act in the Brexit drama

The (for the time being) final curtain in the Brexit drama is rising these days, but it does not look like a good ending for the British financial and fund industry. Until recently, the biggest opportunity seemed to be “Fish for Finance“. But that is unlikely to happen. British financial firms are sitting on dry land if they do not have their own branch in the European Union by now (read the whole article as a PDF).

Until the cancellation of British Prime Minister Boris Johnson last Friday, “Fish for Finance” – a possible trade between fishing rights for EU fishing boats in British waters on one hand and access for British financial products to the European Union on the other – looked quite promising. Haddock for funds or cod for derivatives, so to speak.

The fact that fishing in the seas around Britain has regained such importance in the talks between UK and EU negotiators is not so much because of its economic importance. Although the UK has one of the most productive fishing grounds in Europe, and its fleet brought home the second largest catch in the EU last year (502,000 tonnes of fish worth around £851 million), [1] fisheries account for only 0.1 percent of the UK’s total economic output.

But because many fishermen from England, Scotland, Northern Ireland and Wales were (and still are) strong supporters of Brexit and the issue remains very important on the island, the EU skilfully used “Fish for Finance” in the negotiations.

For example, Irish Deputy Prime Minister Leo Varadkar (who was head of the Irish Republic until a grand coalition was formed in June) warned that without agreement on this issue, British companies would not be able to do business in other sectors. Through the BBC, Varadkar told the British neighbours in January: “You may have to make concessions in areas such as fisheries to get concessions from us in areas such as financial services”.

Only one in eight companies are prepared

Companies from the United Kingdom could urgently need a deal, as developments in recent months have shown. Of all G20 economies, the UK economy, which is heavily dependent on services and domestic consumption, is likely to be hit hardest by Covid-19 and the lockdown.

Although Brexit (whether with or without a deal) has been threatening for years and it was clear since the beginning of this year that the UK would definitely no longer be a member of the EU from 1 January 2021, the withdrawal still gets many companies on both sides of the channel on the wrong foot. In a recent survey conducted by auditing firm Ernst & Young, only 13 per cent of the participating companies said they felt prepared for an UK withdrawal.

“It is astonishing to observe that there are still many companies from the UK that are barely prepared for the time after leaving the EU,” says Robert Scheid, Director of the London office of Germany Trade & Invest (GTAI). “German firms have generally carried out significantly more preparatory work in relation to Brexit”. [2] In recent years, the GTAI has assisted many British companies to open branches in Germany. Last year, with 185 projects, Great Britain provided the second highest number of all new foreign branches and expansions in Germany – only surpassed by the USA (302 projects), but still just ahead of Switzerland (184) and China (154).

In Great Britain, on the other hand, foreign trade with the Bundesrepubik Deutschland is stagnating considerably. British imports of goods from Germany – especially in the automotive industry and mechanical engineering – collapsed under the influence of Corona from January to July 2020 by a nominal 25.2 per cent year-on-year. “In many sectors, investment in production facilities is currently out of the question,” confirms Scheid’s colleague Marc Lehnfeld of GTAI.

JPMorgan moves USD 230 billion to Frankfurt

Great Britain, on the other hand, seems to be standing still or even going into reverse. This has been very evident in recent months in the development of employees and assets in the financial sector.

The number of employees in the British asset management industry, unlike in other European countries, remained rather static this year, reported the industry information service Ignites Europe in early October, referring to data from The Investment Association. Since the Brexit referendum in June 2016, the number of people employed in the fund industry has only risen by just under six percent in the UK, but by nine in France over the same period, twelve in Ireland (between 2016 and 2018) and by a whopping 31 percent in Luxembourg.[3]

The news that the US bank JPMorgan Chase intended to transfer assets of around USD 230 billion and relocate 200 of its employees from London to Frankfurt also raised some eyebrows. And that was just for starters …

(Added 3 Nov. 2020: According to the Deutsche Bundesbank, 64 banks, financial service providers and investment firms from the UK have submitted licence applications in Germany – and the supervisory authority has already given the green light to over 40 of them. By the end of the year, the Bundesbank also expects the five largest banks coming from the Thames to the Main to transfer 397 billion EUR in balance sheet items.)

Since the Brexit referendum, 7,500 financial jobs have been transferred from Britain to the EU.

Since the referendum, according to calculations by Ernst & Young, over 7,500 jobs in the UK financial industry have been transferred to the EU and 24 financial firms have publicly stated that they want to transfer assets worth more than £1.2 trillion to the EU. By way of comparison, according to a recurring survey by the Reuters news agency, hardly 2,000 jobs had been relocated from the UK in early 2019 due to Brexit.

Stricter transparency requirements for managers from third-countries

The exodus of staff and assets has certainly been partly due to warnings by the European regulatory authority ESMA, which wants to impose stricter transparency requirements on investment managers from non-EU countries. The British financial regulator FCA is now trying to get its members in line with EU standards by the end of March 2022.[4]

For British financial services companies that have still not dared to move to the European mainland, things are getting tight. Some smaller companies may hope that it will be enough to open up to European customers by translating the website into German … but uncertainty remains as to whether and under what conditions asset managers from London, Edinburgh and Bristol will be allowed to provide investment services to clients in the EU after Brexit. Also, the question remains whether it is still worthwhile for companies based in the EU to transfer fund management functions to a non-EU fund manager under new ESMA requirements.

Sebastiaan Hooghiemstra, investment specialist at the Luxembourg law firm NautaDutilh, says the new standards are a blow to all non-EU fund managers and increase the administrative burden on non-EU investment companies. “Third-country firms should instead look to set up their own subsidiary with a MiFID II licence in mainland Europe”, Ignites Europe quotes the lawyer.[5]

Especially for smaller investment houses from Britain, it is high time to take three steps before the transition period ends at the end of December: First, to assess the importance of European clients for ist existing and future business. Secondly (in case an exchange with the EU is still considered important) to adapt their own regulatory framework in line with ESMA requirements. And third, to actively communicate the commitment to the European market to customers and business partners.

So, why not invite the best contacts to the island for a portion of fish & chips and a pint of beer to celebrate that?

[1] Source: UK Sea Fisheries Statistics, Oct. 2020

[2] Source: LinkedIn message from Rob Scheid, 07/10/2020

[3] Source: Ignites Europe “Lack of Brexit clarity causes UK industry staff numbers to flatline”, 05/10/2020

[4] Source: Ignites Europe “Brexit: regulatory ‘game of chicken’ brings operational upheaval”, 02/10/2020

[5] Source: Ignites Europe “Non-EU funds hit with tougher supervisory standards”, 29/09/2020

GFC Podcast episode 4: Challenging times for Third Party Marketers

How laborious institutional fund distribution has become in times of Coronavirus and lockdown, and which conclusions can be drawn from this for the future – that’s the topic of the new 4th episode of GFC (not the ‘Global Financial Crisis’) Podcast. And this time it’s completely in English.

I’ve spoken to four Third Party Marketers, external sales consultants, who have been selling funds for a number of asset managers in the German speaking market (D-A-CH-LUX) for decades: Natango Invest and bavi consulting (Bavicon) in the Frankfurt area, Multi Boutique Marketers (MBMs) in Luxembourg and London based Bohanan Ltd. Their verdict: No personal meetings, no pitches for new mandates and much longer investment processes – it’s been tough times and this is going to stay for a while … (original interview as a PDF).

“Digital marketing is a big opportunity for managers of all sizes”

If the business world is united in one consequence of COVID-19, it is the conviction that digital transformation across all sectors and functions has been accelerated by the pandemic. This is especially true for the distribution teams of asset and wealth-managers, say Patrick Ide and Dorit Erzmoneit, Senior Partners for Nurture. They are counting some of the largest brands in the fund industry as well as several niche investment boutiques among their clients.

“Digital marketing’s job is to deliver leads for sales – an incredible opportunity for all sizes of asset managers!”, as the experts for digital engagement explain in an Interview with Gerle Financial Communications.. The importance of the increasing digital presence for investment companies has only recently been demonstrated once more by Universal-Investment’s acquisition of the digital sales and marketing platform CapInside.

Patrick and Dorit are convinced: The ongoing trend to more tailored and deeper digital engagement marketing will eventually rip up the classic sales approach of contacting and meeting clients, only to tell them something they already know. Read more about it in this interview on LinkedIn.

Survey: The biggest hurdles for foreign asset managers in Germany

Specific customer requirements, fund-related regulation and access to distribution partners are the biggest challenges for foreign investment companies in the German market – or at least they were until the Coronavirus lockdown began. The highest personal hurdle for employees and service providers of investment companies was, until recently, the fact that Germany is highly decentralised and has many different financial centres. These are the key findings of the survey “Which hurdles do foreign fund managers have to overcome in the German market?“, which was initiated by the specialised communications consultancy Gerle Financial Communications (GFC).

Between January and March, representatives of 18 companies working for or providing services to foreign fund houses, mainly in sales, took part in the online survey. The participating investment companies come from Europe (nine companies), North and South America (eight) and Asia (one company) and represent a total of approximately EUR 4.3 trillion in assets under management worldwide (as of December 2019).

Please find the complete results of the survey in this press release (PDF file).

“GFC (not the ‘Global Financial Crisis’) Podcast” Episode 1 now live

One of the few positive effects of the coronavirus crisis and lockdown during recent months was that I had more time to take up new things – like creating an editorial podcast (and you wouldn’t believe how much work goes into such a project – even if, like me, you worked in radio a long time ago)! My podcast, which will be published once a month, is mainly about the success and efforts of foreign financial service companies on the German market. The first episode of “GFC (not the ‘Global Financial Crisis’) Podcast” is now finished and can be listened to on Deezer and Spotify as well as on this website (it’s mainly in German, though).

Survey: The hurdles foreign fund companies have to overcome on the German market

The German fund market is and remains interesting for foreign fund managers, and their number is increasing. But what difficulties do investment companies and their employees from neighbouring European countries or overseas face when entering the market? A new survey by Gerle Financial Communications (GFC) is intended to shed some light on this.

Germany remains attractive as a market for foreign investment companies: more and more asset managers are moving to Frankfurt, Munich or the Rhine-Ruhr region. While the number of non-German investment companies in Germany was 28 at the end of 2002, according to the financial supervisory authority BaFin and the BVI industry association there are now more than 700 foreign asset managers operating between Flensburg and Passau.

But the road to “good old Germany” is not easy, and the difficulties before doing business in Germany are manifold (as probably everyone in the fund industry who has ever worked for a US, French or British company will confirm). They range from the complex German tax system to special knowledge of sales and distribution channels and getting used to the (from some non-German point of view) very direct manners. New challenges and trends such as ESG/SRI and the digitalisation of the industry do not make life any easier …

In order to find out more precisely which hurdles foreign investment managers have had to (and still have to) overcome to be successful in the German market, Gerle Financial Communications (GFC), a specialist communications consultancy for financial service providers, has initiated a short survey. This involves both legal and administrative issues (e.g. the question of branch or a subsidiary) as well as sales in Germany and personal challenges such as finding a job for the partner.

The questionnaire consists of only 12 questions and a critical review of the own market entry; the answers should therefore not take longer than 10 to 15 minutes. At the end of the survey – which is open from 21 January to 29 February 2020 – participants can request the anonymised results from GFC in order to provide a benchmark in access to the German fund market.

Portrait of Hagen Gerle in FSB’s member magazin “first voice”

The”Federation of Small Businesses (FSB)” has published a portrait of Hagen Gerle in the “My Business” section of its current issue (January to March 2020) of its member magazine “first voice”. The magazine is published five times a year with a circulation of around 27,500 copies (well, of course this is massive PR is in its own right, but the article also deals with the importance of coffee, running and the benefits of the EU).

universal spotlight: a new magazine for the company anniversary

universal spotlight is a new customer magazine from Universal-Investment which is aiming at institutional clients as well as fund initiators, with whom the now third-largest investment company on the German market cooperates. The first edition was also an anniversary edition, as “UI” has only turned 50. Gerle Financial Communications was jointly responsible for the concept, editing and text of this universal spotlight.

What will financial advice in Germany look like in 2025?

Regulation, commission caps, digitalisation – the topics discussed by seven top-class representatives from politics, consumer protection and financial associations at the Federal Press Conference in Berlin at the invitation of Standard Life Deutschland were pretty tough. The 130 or so guests, mainly independent brokers and intermediaries, also made some very emotional contributions. Gerle Financial Communications supported Standard Life’s corporate communications with interviews and a summary of the event  which was also published in the German financial magazine “Mein Geld” (article in German only as a PDF file).

The Woodford case: When nervous investors sit on illiquid investments

The impending collapse of the Woodford Equity Income Fund (WEIF) in the UK may not only cost (ex-)star fund manager Neil Woodford his company. The crisis also casts a shadow over the increasingly popular illiquid investments, especially among institutional investors, and their supervision.

The case of Neil Woodford, who is currently holding British investors, the media and financial regulators in suspense, can be told from three perspectives: as a drama of the rise and fall of a former star fund manager, as evidence of the carelessness of supervisors, or as a harbinger of the difficulties of active asset managers when they juggle illiquid investments. Above all, however, it is a warning of how reluctantly the key players in the affair communicate.

So, what happened?

Neil Woodford, who after 26 years at Invesco became self-employed in2014 with his company Woodford Investment Management, was popular with investors. Both the large institutional investors such as St. James’s Place and Kent County Council pension fund, but also with many small investors who were busy investing in his flagship fund, the Woodford Equity Income Fund (WEIF), through the leading UK retail fund platform Hargreaves Lansdown.

“His approach, based on bespoke research, gut feeling and a taste for going against the grain, divided opinion,” writes The Economist about Woodford. But the investors in the United Kingdom trusted him: within a short time, Woodford managed to raise the WEIF to a volume of around GBP 10 billion. Around 1.6 billion of these were parked directly or indirectly with Hargreaves Lansdown clients at the end of March – and brought the fund platform a substantial profit margin.

Woodford’s style of investing in large, dividend paying corporations (Blue Chips) changed over time. The manager increasingly relied on the supposed winners of tomorrow: small, partly not even listed and illiquid companies with a focus on the British domestic market. But his risky bets didn’t work, his performance was mixed, and investors withdrew a lot of money from the WEIF.

At the beginning of June, the fund was down to GBP 3.7 billion and when Kent County Council was to withdraw its GBP 263 million mandate on 3 June, the WEIF was blocked from repayments. This freeze remains in place. Comments from Woodford’s firm suggest that it will be maintained for months until the fund has released enough cash to pay out impatient investors.

Market expectations are that investors will flee the WEIF in droves as soon as they are able to do so again. From Woodford’s second fund, the Woodford Income Focus Fund (WIFF), investors withdrew GBP 116 million within ten days by mid-June. Market observers are now publicly questioning whether Woodford’s firm will survive the loss of assets and confidence.

However, what was the downfall of Woodford’s, with his often-down-to-earth appearance, was not his poor performance, Financial Times columnist Merryn Somerset Webb says. Rather, it was a whole series of cardinal mistakes: “Mr. Woodford took too much money too fast. He believed his own hype, forgetting that the team around him at Invesco and particularly its risk management and compliance controls might have been helping him out. But, worst of all, he mixed and changed styles.”

Financial supervision embarrassed

Woodford’s crisis has now spread, embarrassing both Hargreaves Lansdown and the UK Financial Conduct Authority (FCA).

The Chief Executive  of the fund platform, Chris Hill, first had to publicly apologise for why Hargreaves had not earlier removed the WEIF – despite the persistently poor performance and doubts arising from its liquidity –  from his “Wealth 50” recommendation list. Two days later, Hargreaves waived the platform fees for the fund.

Another day later, Nicky Morgan, Chair of the UK Parliament’s Treasury Committee, said that investors should not pay any management fees at all for the WEIF, as long as it is blocked. And while Neil Woodford has so far refused to comply, Hargreaves Lansdown CEO Hill has taken personal action and said he would be waiving his GBP 2.1 million bonus.

„The actors in Woodford’s investment drama haven’t made any effort to quickly clarify and communicate.“

Morgan and Members of Parliament (for a change not immersed in trench warfare over Brexit) ask FCA the unpleasant question: “Did the supervision sleep at the wheel when the fund manager went into the crisis?” Meanwhile, Morgan has announced a parliamentary inquiry into fees and transparency of the entire fund industry. For FCA boss Andrew Bailey, the Woodford case could turn into a career snap: His candidacy to succeed Mark Carney as the Head of the Bank of England will be given little chance.

Whether Woodford, Hill or Bailey – the key players in this investment drama haven’t made any effort to quickly inform and communicate with investors.

Head of Bank of England warns against illiquid funds

It was Carney, by the way, who only recently again pointed out the dangers of illiquid funds: At a meeting in Tokyo, the Governor of the Bank of England warned against investment funds that promise their customers daily liquidity, but invest some of their capital in illiquid investments – around USD 30 trillion have already been invested in such funds, Carney said.

The Woodford case thus also casts a shadow over the liquidity of investments such as private debt or real assets, which are particularly popular among institutional investors in times of low interest rates.

Stable, predictable returns from long-term investments – who would say no to that? However, it becomes problematic if investors unexpectedly want to withdraw from these investments, but pay-outs are blocked … Just remember the crisis of open-ended real estate funds in Germany in 2008 and in Great Britain shortly after the Brexit vote in 2016.

In October last year, the FCA published a 79-page advisory paper on the risk of illiquid investments, which was updated in April. Michael Busack, editor of the German institutional magazine Absolute report, put it in a nutshell in the foreword to the current issue: “Nothing is more dangerous than an illiquid investment that has to be sold under pressure and possibly with the knowledge of other market participants”.