Brexit: preparing through the uncertainty

With only 21 days until Britain is due to leave the EU, it is still not clear what that change will entail for the financial sector. as businesses finalise their preparations to meet the unknown challenges ahead, we speak to leading players in the insurance, funds and banking sectors to find out what Brexit has meant for them.

“I was living in London at the time, and no one in our sector was expecting such an outcome,” says Micaela Forelli, Head of European Distribution, M&G International Investments. “We started immediately with the referendum announcement to prepare for that eventuality. When the result came out that the UK was going to leave the EU we were prepared.”

M&G took action to protect their businesses even before formal negotiations over the terms of Britain’s departure from the EU began. “Before the Brexit scenario kicked in we were able as a UK asset manager to distribute our OEIC structures, which is the current UCITS UK funds, to any audience in the world. Now there is no certainty that any equivalence can be maintained by this structure, it makes it very difficult for us to continue to distribute in the UCITS market.”


M&G, which manages 351 billion pounds globally took a number of steps to minimise Brexit disruption to clients, protect their interests and provide certainty and clarity regardless of the outcome of the negotiations. Forelli explains.

“We wanted for a long time to set up in another domicile outside the UK but we never really had the strong push for it because running one product platform is obviously more cost-effective. Brexit gave us this big nudge to go and set up another platform for the growing international business.”


We started immediately with the referendum announcement to prepare for that eventuality.


M&G already had an established presence in Luxembourg, including a successful real estate management company and product distribution centre. Forelli says the decision to set up an EU hub in Luxembourg
ahead of Brexit was a “natural one”. “Luxembourg’s central location on the Continent combined with its international name recognition and its importance as a worldwide leading investments centre, make it an ideal hub from which to facilitate, and importantly further develop our business internationally.”



The company worked tirelessly for over two years on their Brexit plan which included the establishment of a Luxembourg-based super management company and MiFID distribution firm. “It was
relatively straightforward to apply for the two licenses from the Luxembourg financial regulator, the CSSF. We also had the support from the Luxembourg Ministry of Finance that we could expand our activities and facilitate the gaining of the necessary licenses for fund management, portfolio management and distribution.”

Throughout 2018, M&G built-out their SICAV platform in Luxembourg and began the process of migrating 22 billion pounds of non-sterling assets across 24 UK-domiciled OEIC funds.
“Our project managers have worked incessantly with us to make sure that all would be delivered on time and smoothly. We have already transferred over 35 billion EURO of assets of international investors here into Luxembourg successfully. Our final transfer will happen at the beginning of March after which we will have set up all we wanted at the outset.”


The new legal structure and the SICAV fund range will ensure that M&G’s fund managers and their investment strategies remain available to international clients. “The preparations that we have made now put us and our clients’ money in safety here in Luxembourg in the eventuality of a no deal or a hard Brexit deal so our clients are now invested in European based products and they deal with a Luxembourg based distributor and management company. We have set things up so as to service the UK clients with our UK product ranges and our international clients with our international Luxembourg base product ranges. So there is no downside for the UK clients to be here.”

If the UK crashes out of the EU without a deal or transition arrangement in place, the UK will be classified as a ‘third country’ with limited access to EU markets. In response,
the Luxembourg regulator has struck a deal with the British regulatory authorities that will allow delegation to continue in the short-term, regardless of the outcome of the
political negotiations.

“One of the areas that were under debate until last week was about the possibility of confirming the delegation of the fund management function back into a third country which is what the UK will be after Brexit. However over the last weeks a Memorandum of Understanding was signed off between the Luxembourg authorities and the UK authorities in confirming that delegation will be allowed to continue. Although this needs a final offcial passage, it means that the physical management of the money can happen in the UK as it used to happen before.”


Much of the structural work around M&G’s Brexit programme is now complete, but they continue to monitor political and regulatory developments. Despite the additional costs involved Forelli believes the new cross-border platform will help create scale and eciency, opening distribution to different markets.

Rajaa Mekouar-Schneider

Rajaa Mekouar-Schneider

“Brexit for M&G has also been an opportunities opener. Some clients in the international space did not find it appealing to use UK products for all of their distribution lines.
Hence we can enter into new client segments that were prevented to us before. In the Asia
Pacific, Latin American and US offshore countries investment regions, Luxembourg SICAV products are well known and well accepted by distributors, so this opens up for us further regional opportunities to distribute.”


Two years on, Forelli has left London, her home for the past ten years, to live in Luxembourg. Her new challenge: to develop the group’s new funds and to grow the wholesale and institutional client-focused presence in Europe.

“I find Luxembourg a charming place. It’s a very inspiring place for somebody who works in the fund industry. The fund centre offers a breadth and depth of intelligence, markets, products and capabilities. There is constant research, a phenomenal industry network, thought leadership and a constant forward-looking attitude to progress investments.”


Rajaa Mekouar-Schneider, private equity (PE) investor with twenty years of experience across Europe and emerging markets, was considering a move from London to Luxembourg shortly before the referendum result was revealed.


The appetite for deal-making in the UK among private equity groups has nearly halved since the British vote to leave the EU.

Rajaa Mekouar-Schneider

“After working in London in PE for 15 years, I was looking to move to another EU capital which offered great connectivity and substantial business opportunities in an international environment. The UK has the largest PE market in Europe but since the British vote to leave the EU, the appetite for deal-making in the UK among private equity groups has nearly halved.”


Mekouar-Schneider, now Head of Private Equity for a local Single Family Office, believes the biggest challenge short term is the continued uncertainty surrounding the UK ́s withdrawal from the EU.

“Brexit is not welcome by the PE industry at large, whether in the UK, Luxembourg or elsewhere in Europe. It is a lose-lose situation for all,” says Mekouar-Schneider, who Chairs the Luxembourg Private Equity Association (LPEA).


Key PE players in Luxembourg, including General Partner firms, law firms, tax advisors and third- party AIFMs are scrambling to draw contingency plans for their clients, thus preparing for any outcome.

Rajaa Mekouar-Schneider

“The biggest challenge short-term is the uncertainty surrounding its actual condition when it is due to happen. Key PE players in Luxembourg, including law firms, tax advisors and AIFMs are scrambling to draw contingency plans for their clients, thus preparing for any outcome.”


The amount of money managed by private equity funds registered in Luxembourg has shot up this year, as the country continues to benefit from fund managers planning for the UK’s departure from the European Union. Luxembourg AuM in PE is now 500 billion EURO.


We see many of the top 20 firms turning into multi-strategy powerhouses that encompass more than just PE Investments.

Rajaa Mekouar-Schneider

“I doubt that PE will disappear from the UK and move elsewhere altogether, as the
deal makers have been there for 30 years and enjoy living in London. But if there is a
“hard Brexit”, it may force them to re-evaluate their entire life arrangements. My prediction is that we will rather see GP teams still sitting in London but with larger operations here in Luxembourg, especially “deal-mak-ing” or “front office substance” staff, which has been a growing trend independently from Brexit.”

Since the Brexit vote, a number of the buyout industry’s biggest names, including Blackstone Group LP and BC Partners, have registered Luxembourg alternative investment fund managers. Also the Swedish private equity firm EQT decided to use Luxembourg as their global operations hub back in 2017.

“This is part of a move to consolidate operations as running costs of PE firms have increased on the back of regulatory pressure and the growing complexity of processes because the business is growing strongly. We see many of the top 20 firms turning into multi-strategy powerhouses that encompass more than just PE Investments, having developed Direct Lending, Infrastructure and Real Estate Strategies.”


Mekouar-Schneider says that the sector is expanding, thanks to its long-term out-performance in a generally volatile and low yielding investment environment.

“We notice new types of investors coming into PE as they seek returns and not necessarily liquidity. These include Family Offces and Wealth Managers. Traditionally PE used to be the remit of pension funds and insurance companies, who remain the largest investors in the asset class, but as the industry offers so many alternatives in terms of strategies and niches, it broadens its appeal.”

Although London continues to dominate the European VC investment landscape according to Mekouar-Schneider, it could all change after Brexit:

“It is increasingly a multipolar VC Europe, which is for the better. VCs go where the talent and the money are, and it is a self-feeding mechanism. If Brexit is on the “hard side”, the largest investors in the EU VC, will stop funding UK-based deals, which will surely hurt London and centres such as Luxembourg, Paris and Frankfurt are benefiting.”


Luxembourg saw the arrival of 12 new global insurance and reinsurance companies, which decided to move their European headquarters to the country ahead of the UK’s departure from the EU.

“Our business is ready for Brexit, even if our politicians are not,” explains Andrea Schmid, Head of Legal and Compliance Europe, at Hiscox, a leading global specialist insurer
who set up a new European subsidiary in Luxembourg.

Andrea Schmid

Getting to this point has involved writing to several hundred thousand of policyholders, consulting with various European regulators, completing numerous legal transactions including cross border mergers, transferring our staff from one legal entity employer to another and updating some of our systems and documents. It has been a huge and expensive undertaking to put in place the structures needed to continue to serve European customers as well as those of our customers from elsewhere with EEA risk exposure.”


We have executed contingency plans to ensure cross-border contracts are honoured in any eventuality, even if there is a no-deal Brexit.


Hiscox’s decision to base its new Europe an headquarter in Luxembourg was taken after a thorough review of various possible locations.

“Luxembourg is a strong financial services centre with established infrastructure for insurance companies and as one of the founding members of the EU a safe choice for political
stability. One considerable advantage is that the Luxembourg regulator is dedicated to insurance, which is not the case in a lot of jurisdictions. Geography was also an important factor with Luxembourg being located in the centre of Hiscox’s existing European operations with good access to attractive local and neighbouring multilingual talent pools.”


The insurer established Hiscox SA in July 2017, enabling it to conduct insurance business – a crucial first milestone of their Brexit plan. The application for a license from the Luxembourg insurance regulator was the next step.


Luxembourg is a strong financial services centre with established infrastructure for insurance companies.


“The expertise, responsiveness and accessibility of the team in charge of our application
file within the Commissariat aux Assurances (CAA) allowed for a relatively fluent application process. We had to address numerous questions from the CAA to complete the application file. However, when the regulator asks pertinent questions exemplifying rigour, accuracy and expertise you may find it painful within the process but it provides comfort as to the quality of supervision of the insurance sector in Luxembourg.”


Schmid says that, insurers have to shoulder the cost of taking matters into their own hands, so that customers are not cut off from their insurance policies and, in the case of life insurers, pensions after Brexit.

“We have executed contingency plans to ensure cross-border contracts are honoured in any eventuality, even if there is a no-deal Brexit. On January 1, 2019, we transferred
the existing policies with EEA risk exposure to Hiscox SA via a legal process called a
Part VII transfer. The main aim of this court sanctioned legal transfer is to ensure the process runs smoothly for brokers and policyholders, with contract certainty and coverage continuity.”

Like others, preparing for Brexit has been a lengthy and complex exercise for Hiscox but the insurer is gearing up to take advantage of newly emerging opportunities.
“Brexit has been a unique opportunity for Hiscox to shape its future European business through a simpler corporate structure as a result of having a new centre of excellence in Luxembourg. The assurance functions we have established in Luxembourg are part of a robust governance and control structure of Hiscox SA and will ensure we develop new business in Europe and continue to thrive.”