Post-Brexit questions loom over Europe

The post-Brexit environment is still quite hazy, but the politicians and regulators in the EU are trying to lay markers for future discussions and negotiations. There have been several comments that betray a fear of further demands for exits from  the EU by the politicians and citizens of other countries that have high levels of Euro-scepticism, such as the Netherlands, France and Greece. 
The French president recently stated that clearing for Euro-denominated securities would no longer happen in London and this "could serve as a lesson" to those who are questioning the need for the EU. Strong words indeed for a market that currently gets jittery at the drop of a hat. In a similar move, the president of the German financial regulator, BaFin, has  also expressed doubts on the possibility of the LSE-DB merger if the resultant entity is based in London. The exchanges themselves have mentioned their intention to go on inspite of the added complexity due to Brexit, but I am sure they are keeping an eye on the political headwinds that are developing around them.
On their part, the British politicians and regulators are trying to calm the markets down and lull them into believing that little has changed in the aftermath of Brexit. The desire to delay invoking Article 50 to officially confirm UK's demand for exit is an example of this strategy, although EU leaders are opposed to this move. The claim by the politicans who supported Leave that there would not be any major and immediate economic or financial change after the referendum is another attempt of this nature.
While both these parties would probably be interested in discussing the issues that have arisen behind closed doors, in public they have to make the right noises to ensure damage control. There is also anger and resentment in the EU at the UK's decision and this shows from time to time in some of the comments. The German Chancellor Angela Merkel has a very balanced attitude to Brexit, but she has also conceded that the UK cannot enjoy access to the EU single market the same way as it did earlier, something that was suggested by Boris Johnson. There is a genuine concern in the EU to prevent cherry-picking in this regard. 
The various questions that have arisen post-Brexit will take a while to be answered. But what is clear is that there is going to be a significant parting of ways and the separation is going to be less than amicable, at least in public. For capital market professionals, in this landscape the discussion ends up being about political rather than economic or financial issues, in spite of trying otherwise. The latter have to take a backseat at time like this and this might continue for the weeks and months to come.

A New Black Swan

So the latest Black Swan was spotted in the last few days in the UK when the outcome of the Brexit vote took everyone by surprise. While many are still trying to make sense of the whole situation and figure out what it means for the future, the only thing that is certain at this moment is there will be a lot of uncertainty in the coming weeks, months and possibly years.

In question is the constitutional and political arrangement of the United Kingdom and broader EU, but how is it going to impact the financial services industry? The future of the “bank passport” that allowed financial institutions to do business easily across Europe will be a topic of much interest. Restrictions in ease of doing business might result in them moving out of the UK, and some have already started the process. This would not only result in shifting (if not loss) of banking jobs, but could also balkanize the markets. Technology requirements, for example hosting of data centers within national jurisdictions, could similarly balkanize operations. This would also impact adoption of centralized operations, like cloud services, and slow down the growth of start-up culture and innovation. Balkanized operations and restricted market access would deter or slow down smaller players in designing and launching innovative solutions, and help larger incumbents.

Then there is the question of pan-European regulations and initiatives like Target2 Securities. T2S entailed firms with significant European presence to restructure their operations across Europe. While UK never decided to join the T2S project, firms with European operations were so far busy designing their optimal operational mix within continental Europe. If the UK vote now requires further restructuring that may force them to rethink their current plans and impose additional resource constraints. Also of interest would be the LSE-DB merger; even though both parties have said the deal is not threatened by the vote, politicians might have other ideas.

The political negotiations in the coming weeks would therefore be closely watched as market participants look to navigate their way through the latest developments. All in all the level of complexity and uncertainty in the system has suddenly grown manifold. All blame the Black Swan.

To Brexit and beyond!

So the Brexit has finally happened. The equity, forex and bond markets are still reeling from the news, the volatility probably caused as much by the fact that Brexit was unexpected as of yesterday night in the UK as by the event itself.
While the overall impact will reveal itself over the next several years, in the next few months the capital markets would have to deal with issues such as the future of the LSE-DB merger. Does it make sense anymore, and if yes, how do the two parties proceed? One would expect that now there would be political pressure to ensure that trading and jobs do not move away from either London or Frankfurt. Keeping all stakeholders happy would be a more complicated affair, although it could still be done.
EU wide market infrastructure regulations such as T2S and MiFID II would also now be seen in a new light. London was seen as the financial capital of Europe. The EU would now have to proceed with these significant changes at a time when the UK is preparing to exit, and is weighing its options in terms of how best to deal with the rest of Europe. It could take a middle ground as Switzerland has taken, or position itself even further away with more legal and policy independence but less overlap with the European capital markets.
In an earlier blog that considered the possibility of Brexit, I stated that technologically this might be the best time for an event such as the Brexit. Technology is more advanced and we are better connected than ever before across nations and continents. However, undoubtedly there will still be significant impact from an economic, financial and demographic point of view. As always, there will be winners and losers. As a neutral, one hopes that the people in the UK are able to achieve the goals they had envisioned in making this decision.

Is this the best time for an event such as Brexit?

It is difficult to read financial news at present without coming across extensive coverage of the Brexit referendum in the UK and its possible impact. As part of the financial sector, capital markets could be at the forefront in terms of bearing the impact of any likely change. There are already widespread claims of how London could lose its position as the premier European financial center. Of special relevance is the advantage that London has due to the 'passporting' principle, which allows leading U.S. or Asian banks and other firms to access the Europan market without any restrictions. Certainly with regard to these firms, if the UK leaves the EU, US and Asian banks that have based their teams in London while serving the European market will have second thoughts about doing so. Different alternatives have been touted, including Paris, Frankfurt and even Dublin. Some believe that all of these cities, and some other European financial centers as well, would benefit from the departure of the leading global banks from London, but this could lead to fragmentation in the European financial industry and reduce the effectiveness and competitiveness of European firms. 
There are various views and opinions that have been expressed during the run-up to the referendum. Many of these hold water. But in my humble view, when it comes to competitiveness, if the departure of the UK from the EU does lead to a fragmentation of the European financial industry, then this is the best time for it to happen. Technology has today advanced to a level that to an outsider, there would be little tangible difference if a thousand people in a bank are based across four difference financial centers in Europe instead of being in one place they were earlier, namely, London. There would certainly be a one-off rise in cost due to such as move, but the industry should be able to take that in its stride. Furthermore, a more fragmented industry in Europe would also have the ability to address national and regional requirements better than a single leading financial center. So financial creativity and innovation might get a boost across Europe. One would expect that London would continue to be a leading financial center globally, but it might be forced to reinvent itself to continue to be relevant for global banks and financial firms from outside the UK. Therefore, as a neutral and a student of capital market technology trends, Brexit does not necessarily hold many fears and might even lead to some interesting outcomes. Whether people in the City of London or the rest of the UK or indeed Europe have the same view, is of course, another matter!

Newfound financial freedom: pension reform update – what about the mass affluent?

Today I had the pleasure of attending the Wealth Briefing Summit held at the prestigious Guildhall Art Gallery in London.   The event consisted of 3 sessions and was led by a panel of industry experts who conversed about some of the most pertinent topics facing the UK wealth management industry today: pension reform,  digital solutions, and personalized portfolio construction. While each of these sessions were of interest to me, I found the pension reform “debate” (in quotes as this was much more civilized than the recent PM election debates have been) particularly intriguing. Clearly, one of the solutions to navigating through the new pension rules will be advice from a wealth manager. But, as we know, not everyone wants this advice or can afford this advice. So what are the mass affluent going to do? This was a question raised by an audience member (and a fair one at that). After all, everyone is entitled to a pension and will presumably need some form of guidance in light of the reforms.  I was surprised that not one of the panel members mentioned the idea of automated investment advisors; Nutmeg and insurers (who have created their own automated investment platform) have entered into the pension space. It’s a good thing we’re here (see our wealth management reports) …anyway, I digress. Perhaps this is an indication that automated investment advisors have barely tapped into the UK wealth management market, or could it be that the panelists’ firms are building their own robo advisor solutions, but are keeping this under wraps for the time being? Or, maybe traditional wealth managers are so out of touch with the mass affluent (we know this to be slightly true), that this question hadn’t occurred to them previously? This is a thought-provoking topic in my opinion, and one that I look to explore further in an upcoming report about the UK retirement market.    

Newfound financial freedom – pension reform in the UK

The UK pension industry will undergo significant regulatory changes in a few weeks’ time. From 6th April, millions of savers aged 55 years old will be permitted to take the cash from their pensions and will no longer be herded into buying annuity products.  Historically, savers had the freedom to take 25% of their pension in a tax-free lump sum, then were encouraged to buy an annuity with the remaining 75%.  However, pension reforms will now enable savers over the age of 55 to take out smaller lump sums (in each case 25% of the sum will be tax-free). The government has also changed rules around the 55% inheritance tax rate. What are the implications of this newly instituted “financial freedom” that impacts millions of Britons?  This historic change will bring about opportunities and challenges to the investment management industry and raise questions among retirees about tax consequences, suitable products and fees, life expectancy calculations, and wealth transfer and estate administration, for example. While these liberties provide retirees with control over their financial destiny, one must ask if they are adequately prepared to make the critical investment decisions that will impact the rest of their lives, as well as that of their heirs. Who is poised to help them? Perhaps this an opportunity for automated investment advisors and traditional investment managers to join forces (Nutmeg’s recent entrance into the pension space & “Retiready” from Aegon both come to mind).

How has the UK online retail brokerage market evolved over the past 12-18 months?

The self-directed brokerage market in the UK continues to evolve in the post-financial crisis world. Investors increasingly demand transparency, competitive pricing, greater control over their investments, and multichannel account accessibility, while regulators impose stringent legislation with the intent to protect investors. Despite a challenging and volatile environment over the past several years, the self-directed market has shown moderate growth. In an effort to retain and attract retail investors, online brokerage firms continue to improve the client experience by enhancing trading functionalities and platforms, offering multichannel account access, deepening their asset class lineup, and developing innovative, tech-driven tools and solutions. The UK brokerage market is fragmented, with market entrants and “digital disruptors,” such as digital online advice and social trading firms, which are challenging traditional brokerage firms, while nontraditional brokerage firms have expanded into the space. In this report, Celent aims to provide an overview of the current UK online retail brokerage market with particular attention to digital strategy developments among firms serving the self-directed retail investor. Celent will endeavor to:
  • Segment the UK brokerage firms based on their client type.
  • Identify recent developments and trends to the industry.
  • Categorize retail investor product preferences.
  • Provide a breakdown of the various customer investor groups.
  • Size the retail investor market by approximating the current and future self-directed investor population and next generation of investors.
  • Identify the major market players and types of firms.
  • Highlight developments in firms’ digital strategies, including the online, social, and mobile channels.
  • Conclude with a prospective look at the future of the online brokerage industry, the growth of the various retail investor categories, and how online brokerages can differentiate themselves in the marketplace.
“In order to attract and retain clients, particularly NextGen investors, online brokerage firms should focus on building a robust digital strategy,” comments Ashley Globerman, an analyst with Celent’s Wealth Management practice and author of the report. “With the proliferation of the Internet, information and education, social media, and the affordability of smartphones, clients’ expectations are changing. As such, the enhancement of online trading platforms, mobile apps, and social media presence are critical features to develop in this fragmented market. For example, we are seeing the addition of social features and hybrid services, both DIY and advisor-led, among traditional brokerage firms.”