The European Securities and Markets Authority and various European securities regulators have signed memoranda of understanding with the UK's Financial Conduct Authority to keep current 'delegation' rules in place if the UK leaves the European Union without a deal. These rules permit funds to be managed from the UK when they are domiciled and regulated in the European Economic Area.

The MoUs are good for UK-domiciled asset managers such as Standard Life Aberdeen plc (A3 stable) and Janus Henderson Group plc (Baa2 positive) because they will not have to activate costly contingency plans to continue to serve European clients if no deal is struck. International asset managers such as BlackRock (Aa3 stable) and FIL Ltd (Baa1 stable) that use London as their European management hub will also benefit from the MoUs.

Although the UK has granted temporary licences or 'permissions' to firms in the European Economic Area (EEA) to continue to sell funds to customers in the UK for at least three years after Brexit, it has extracted no reciprocal arrangement from the Europeans. As a result, UK-domiciled asset managers have moved more of their resources into Europe, applying or upgrading their management companies' (mancos') licences, while also seeking to ensure they have authorised operations operating in the post-Brexit EU that will have good enough risk control functions and the minimum requisite numbers of dedicated sales staff. This has cost them dearly in additional operating expenses.

The loss of portfolio management delegation would have prompted financial institutions to reorganise their businesses (or relocate their portfolio management teams to the EEA) in a much more costly and comprehensive way. Of the UK's £7.7 trillion asset management market, 22% of industry assets are managed on behalf of EEA-domiciled clients. Of these, the vast majority (84%) are managed in Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Fund Managers Directive (AIFMD) funds domiciled in Ireland and Luxembourg. The delegation rules allow these funds to outsource their portfolio management functions while being subject to strict controls, oversight and accountability by their national regulators, in compliance with EU rules.

Of the independent UK asset managers with the largest exposure to European clients as a percentage of assets under management, Ashmore Group and Aberdeen Standard Investments (part of Standard Life Aberdeen plc) would have been most affected in the absence of the MoUs.

Marina Cremonese can be reached on +44 207 772 8621 or at marina.cremonese@moodys.com