London ILS fund managers see domicile options post-Brexit: Cadwalader

Uncertainty surrounding regulation and passporting rights in the UK post-Brexit has seen some insurance-linked securities (ILS) investment managers look to migrate sections of their operations, according to International law firm Cadwalader, Wickersham & Taft LLP (Cadwalader).

Following the UK’s vote to exit the EU last month, there’s been much discussion around the region’s access to the European single market and resulting regulatory impacts and hurdles for the financial services industry, including the insurance, reinsurance and ILS space.

In relation to the ILS market, Angus Duncan, Partner, London at Cadwalader and Robert Cannon, Specialist Counsel, London at Cadwalader, explained that in the near term it’s likely to be status quo for the ILS space, and it’s difficult to predict with any certainty what the environment might look like after an article 50 notice (the notice given that officially marks the beginning of the UK leaving the EU, and which lasts for two-years).

Ultimately, for ILS transactions themselves the fact that the UK is leaving the EU shouldn’t result in any material impact, explains Cannon, but for the broader ILS industry potential problems with passporting rights has caused some ILS managers to look at moving at least some of their operation to another EU member state.

As part of the EU, being domiciled in the UK allows ILS managers to utilise their UK authorization to effectively passport to other EU member states, enabling them to carry out activities in other member countries without any direct regulation, explains Cannon.

Ireland and Luxembourg are the two main onshore ILS domiciles and therefore any London-based ILS investment manager/fund that uses their UK passporting rights to offer services in either domicile, may need to move all, or part of their business to a remaining EU member state. This would enable the firm to continue to manage those funds from a remaining EU member state and receive typical passporting rights, explains Cannon.

“For many managers that we already work with in both the ILS space and more generally, they are looking, or indeed have already started procedures to migrate some of their activities and seek authorisations elsewhere,” said Cannon, during a media conference call exploring the potential impact of Brexit on the ILS market.

So it appears some London-based ILS funds are already taking steps to mitigate the potential fall-out from Brexit, by either moving all or some of their business elsewhere in the remaining EU. While this doesn’t necessarily mean that firms need to shut down their entire London operation or indeed have, it does require moving personnel elsewhere or searching for new talent.

The same applies to London-based brokers and investment banks (Cannon notes that in the ILS space for European business many entities are London-based), as they rely on UK passporting rights to move throughout the EU.

Unless the UK agrees a regime with the EU that enables passporting to continue immediately after Brexit takes place, or unless the UK joins another regime that applies to other countries such as Norway and Iceland (known as the European Economic Area (EEA), Cannon states that brokers, investment banks, and ILS managers will need to move at least part of their operation to continue passporting and current activities.

Something that would also require a second set of regulations and so on, plus the need to hire or move personnel, says Cannon.

It’s unclear which firms have already started preparing for life after Brexit, and as the drama continues to unfold it’s possible more and more fund managers will look to redomicile to a remaining EU member state in order to utilise vital passporting rights.

Unless the UK negotiates equivalent passporting rights with the EU or joins an existing regime, which Cannon says the EU has expressed doubt over, it might prove necessary for the London-based entities to move at least a share of the business abroad.

Nothing is likely to change in the immediate term and until an article 50 notice is in effect the ILS market shouldn’t have any reason to change and will be pretty much status quo, explains the firm.

Duncan also said that London’s ambitions of becoming a global hub for ILS shouldn’t be impacted in the near-term either by the Brexit vote, but again, uncertainty surrounding regulation and the remaining EU member states remains, so it’s difficult to predict anything in these unprecedented times.

Also read:

– Reinsurers best positioned post Brexit: Deutsche Bank.

– London should “be bold” on ILS post-Brexit: Drinker Biddle.

– Consistent access to reinsurance positive for re/insurers post-Brexit.

– Post-Brexit uncertainty for re/insurance, low correlation highlighted.

– No immediate Brexit hit to ILS market, but structural issues to consider.