Across Europe, 2017 looks set to be an even more chaotic political year than 2016. With elections due in The Netherlands, France and Germany, we will face more questions concerning the shape and future of the European Union and the single currency. Add to this the ongoing doubt concerning the United Kingdom’s negotiations to leave the EU and continuing political and economic instability in Italy, it becomes clear that the only certainty we can predict is uncertainty.
Given the risks and timelines involved, asset management firms will need to have strategies in place to address all possible outcomes. Firms with a UK presence will need to start to contemplate the most extreme scenario: a hard exit within the shortest timeframe.
Perhaps the most challenging factor will be the potential timeline. If asset managers need more time to change their business and operating models than the most optimistic timeline for Brexit, then they will need to consider how to best mitigate the risk. They may need to in part, or fully, implement these plans in advance of knowing the final outcome. If this includes diversifying their business into continental Europe, they will be potentially looking to execute this in line with many other firms, increasing the time and effort required.
With the seeming rise of protectionism, the global approach for asset managers will come under increasing pressure. If this apparent shift becomes a reality, it could have very significant impacts on our industry. This is because, in recent years, regulation, whilst not always completely comparable, has been generally sympathetic as governments and regulators looked to facilitate global financial markets. If the regulatory authorities in major markets begin to move in more independent directions, this will have significant impacts on firms with globally shared technology stacks. The effort, cost and complexity of keeping the model and associated technology in line with these contrasting and potentially conflicting demands may become untenable or even unrealistic.
If protectionism does become the established modus operandi, it will bring into question the global operating model. Will the advantages of scale and geographical footprint continue to exist or will the increased cost and disruption become a millstone and allow national organisations, focused and optimised for a single market, to gain ground? Will asset managers who have built and taken advantage of offshore centres in low cost countries still be able to realise these economies, or will protectionist policies start to equalise these locations against domestic centres.
Much is yet to be determined, but one thing is for certain: for Operations staff within European asset management firms, the new year will be anything but peaceful.