First let’s set out the terms of engagement. I’ll keep this one politically neutral. I’ve got an opinion like everyone else, but this post is about the practicalities and not how we got here. Let’s put the tribal warfare on hold for a few minutes.
I’m not going to BS you with 1,000 words on Brexit-proofing your portfolio either. The idea that we can take back control (of market volatility) with a quick shimmy into this fund or that is delusional.
What I am concerned about, as a passive investor, is whether I’ll still be able to buy and sell my ETFs and index funds as needed in the midst and aftermath of a no-deal Brexit.
Specifically, what are the chances that a UK-based investor who owns index trackers domiciled in the EU (mostly Ireland and Luxembourg) will experience some kind of disruption?
Could your investments be stuck in the financial equivalent of a lorry park outside Dover?
To stop asking questions for a sec and to start answering them, I’m glad I’ve looked into this because I’m much less worried now than I was.
The relevant authorities seem to have taken the steps necessary to ensure that it’s business as usual – even in the event of no-deal.
Just in case I misrepresent the scale of my expertise, I’d like to state upfront that I’m not a world expert in the dissolution of 47-year-old international treaties.
I’ve reached my conclusions by triangulating the announcements and actions of the various institutions and groups with direct control, influence, or interest in the outcome.
That list of party guests includes:
- UK Government
- The Financial Conduct Authority (FCA) – the UK financial markets and services regulator
- European Securities and Markets Authority (ESMA)
- Central Bank of Ireland – the Irish financial regulator
- UK fund industry
- Irish fund industry
- UK financial media
- UK mainstream media
- UK and Irish law firms
- Platform managers
- London Stock Exchange
I expected to find plenty of cracks in the facade between those groups given their competing interests, but closer inspection of the Brexit timeline reveals a reassuring pattern:
- Uncertainty is raised and speculated upon by the media.
- Advice is issued by the law firms.
- Industry stakeholders pressure their governments.
- Governments wake up.
- Regulators issue some fix or patch.
- Media move on to the next concern.
It’s quite the civilised waltz when you view it over a few years worth of cached pages. The level of cross-Channel interdependence is unsurprisingly huge and nobody has an interest in screwing it all up.
Obviously, there are unknown unknowns and you can’t entirely discount the possibility of someone sticking a cosmic spanner in the works. But the loss of EU domiciled investments is no longer on my list of nagging concerns.
If you care to know why then let’s keep going…
The potential problem
If you own an ETF in your portfolio then it’s probably domiciled in Ireland. You may also own ETFs domiciled in Luxembourg.
(Your ETFs are overwhelmingly likely to be listed on the London Stock Exchange but this isn’t the same thing.)
Meanwhile your index funds are likely to be a mixed bag, predominantly domiciled in the UK or Ireland.
As a UK-resident investor I don’t need to worry about disruption to UK-domiciled funds, but Brits abroad may well be concerned.
European domiciled investments use ‘passporting’ rules to take advantage of the single market. The passporting rules allow any firm or fund authorised in one European Economic Area (EEA) state1 to conduct their business in any other EEA state without further hoop-jumping. Passporting enables EEA-domiciled trackers to be marketed at ‘retail’ investors (that is, the likes of you and me rather than institutions) across borders.
Passporting to and fro the UK goes up in smoke in a no-deal Brexit scenario.
ETFs are generally domiciled in Ireland and listed across the rest of Europe because the Irish regulatory regime is the easiest and cheapest for fund companies to navigate.
My immediate concern is that the end of passporting could:
- Prevent trading in my investments until the regulatory log-jam is sorted.
- Decimate my choice of investments. (For example, I’d be allowed to remain in my EU domiciled trackers but not to add to them.)
My longer-term concern is:
- Costs go up due to an increased regulatory burden or lack of choice in the UK.
- Some useful new trackers aren’t made available in the UK.
If you like dwelling on problems then enjoy this meaty list of Brexit-related investing issues.
The Temporary Permissions Regime ‘backstop’
Vanguard told me that it will be able to continue selling and marketing their Ireland-domiciled funds and ETFs in a no-deal scenario thanks to the UK Government’s Temporary Permissions Regime (TPR).
This checks out.
The UK’s financial markets regulator, the FCA, states:
The temporary permissions regime will allow EEA-based firms passporting into the UK to continue new and existing regulated business within the scope of their current permissions in the UK for a limited period, while they seek full FCA authorisation, if the UK leaves the EU after 31 October and there is no deal.
It will also allow EEA-domiciled investment funds that market in the UK under a passport to continue temporarily marketing in the UK.
The key takeaways from the underlying detail are:
- The temporary permissions regime solves the passporting problem for UK-resident investors in a no-deal scenario.
- Temporary means the arrangement lasts for three years after Brexit.
- Firms can obtain UK authorisation for their EEA-domiciled funds during that three year period.
- The FCA says the temporary permissions regime is now law.
- Firms must sign up to the temporary permissions regime and the FCA recently extended the deadline to Oct 30 2019.
I’m assuming that global corporate giants like Vanguard and BlackRock (the owner of iShares) have the wherewithal to get their paperwork sorted by the deadline.
I’m also assuming that this open door to the UK market won’t be closed by the EU. They’re no more likely to block your access to EU-domiciled trackers than to deny you a new BMW or a wheel of Brie.
I didn’t come across a scheme that waves UK-domiciled funds through EU passport control, but I wasn’t specifically looking for it, either. A few UK investment firms have commented and don’t appear concerned. More on that below.
One wrinkle to watch out for is if you own funds that aren’t labelled Undertakings for Collective Investment in Transferable Securities Directive (UCITS) or Alternative Investment Funds (AIFs).
The temporary permissions regime specifically states that it covers UCITS and AIF funds.
The vast majority of index trackers are UCITS but it’s possible you own stuff that doesn’t qualify.
- Some fund-of-funds aren’t UCITS, though Vanguard’s LifeStrategy product is. (It’s also domiciled in the UK.)
- Exchanged Traded Commodities (ETCs) aren’t UCITS. You may well own a gold ETC.
Look out for sneakiness like iShares labelling its gold ETCs as UCITS eligible. That doesn’t mean the ETC is a UCITS fund. It’s not. UCITS eligible means the ETC can be invested in by a real UCITS fund.
I couldn’t find out whether ETCs are somehow covered by the temporary permissions regime. The regulatory tenor is to minimise disruption but this is one doubt I couldn’t dispel.
Worst case scenarios
Perhaps you’re tiring of my optimism and would like some good ol’ reptilian brain food as brought to you by Project FearTM?
Let’s turn to the FakeNews media to undermine our faith in this great country of ours. What’s the worst Brexit nightmare they can conjure?
The Money Observer came up with this blood-curdler:
A worst-case scenario would be that UK investors face less choice when it comes to selecting funds.
The Investors Chronicle chilled my spine with:
Exchange traded fund (ETF) providers could face higher costs and investors might have less choice of ETFs if Brexit (a UK exit from the European Union) brought with it the end of single-market trading agreements whereby Ireland and Luxembourg domiciled funds are automatically granted access to the London Stock Exchange.
In a worst-case scenario, providers would have to list separately in the UK, an exhaustive process involving high fees and an administrative burden.
And some managers of EEA UCITS funds may not seek UK authorisation once the temporary permission regime expires, foretells law firm Allen & Overy.
Whatever you think of experts these days, it’s plausible that UK regulators will make it extremely simple to rebadge EEA UCITS funds as UK UCITS funds. If so then the ‘less choice, increased cost’ nightmare scenario shouldn’t come to pass. Fingers crossed that British administrators don’t replace red tape with red, white, and blue tape.
The lack of incentive for our government to create friction for UK plc’s financial services industry dovetails nicely with the incentive for companies like Vanguard and Blackrock to ensure their index trackers remain widely available, given that scale is a critical component of their business model.
What do the investment platforms say?
Remarkably little given you’d think they’d want to address any customer concerns. There’s plenty of ‘Hey, don’t stop investing because of a leetle bit of Brexit uncertainty’ but virtually no guidance from the major players on how no-deal could affect access.
The notable exception is AJ Bell who published a decent piece outlining the risks – though even that was written for financial advisors rather than consumers.
At least back in October 2018, AJ Bell didn’t see a problem with trading ETFs on the London Stock Exchange:
ETFs are very rarely domiciled in the UK, however all our investments are in ETFs listed on the London Stock Exchange. Although the underlying fund may have to consider any regulatory effects due to not being domiciled in the UK, we will be able to continue to buy and sell our holdings through the secondary market, trading on the LSE.
Although it also speculated that costs could rise post-Brexit:
Announcements made to date by the FCA indicate temporary permissions would be put into place to allow existing funds to be held and traded after Brexit for a period of time. However it would create a cloud of uncertainty.
It is likely that fund groups will look to set up UK-domiciled vehicles and transfer investors across, which could incur costs for both the fund group and the underlying investor, depending on the mechanism used (such as a scheme of arrangement).
EU investors using UK domiciled funds
I came across a couple of UK investment firms who made reassuring noises about continued access to products for EU residents. Generally the information was scant and buried in Brexit FAQs but I ran out of time to pursue this angle.
There doesn’t appear to be an EU equivalent of the temporary permissions regime and the FCA advised back in February:
If the UK leaves the EU without a withdrawal agreement (a no-deal scenario), UK firms’ ability to continue to service EEA-based customers (including UK expats) remains a concern.
EEA-based customers (including UK expats) holding retail investment products serviced by UK providers could be affected if their UK provider cannot operate in the EEA after Brexit.
I don’t want to worry you unduly. The general thrust is that bridges are being lashed together rather than wired to detonate. There were some rumblings about EEA access to the London Stock Exchange a few months ago but the EU regulator seems to have rowed back on their intransigence since.
Interdependence creates workarounds and there’s a reason that both Vanguard and Blackrock have been busy expanding their European branch offices while maintaining their European headquarters in London.
Many other firms have been doing the same thing.
Nothing to worry about?
Obviously I can’t say nothing could go wrong. I’m personally reassured by the FCA’s moves but if you’re still nervous then:
- You could switch your investments into a near-identical portfolio of index funds domiciled in the UK. There’s plenty of good, cheap funds available via the major index fund providers. Look out for the letters GB at the start of the fund’s ISIN number which you’ll find on its webpage, Key Investor Information Document or factsheet. GB means that it’s domiciled in the UK.
- Or you could leave things as they are knowing you can always continue to pound-cost average into UK-domiciled funds if there is a no-deal Brexit interregnum.
- It might also be wise to fatten up your emergency fund with extra cash to cover any extended period of disruption. I’m doing this right now but that’s more with an eye on the gathering clouds of global recession.
- Go straight to the sources below for more reassurance (or worry-fodder!)
Aside from that, when it comes to no-deal Brexit, I’m making like a good passive investor and doing absolutely nothing.
Take it steady,
Further reading: A no-deal Brexit linkfest for the fastidous
- FCA Brexit page
- FCA temporary permissions regime page
- Bank of England Brexit page
- Bank of England temporary permissions regime page
- UK Government – investment fund legislation background
- The European Securities and Markets Authority (ESMA) Brexit page
- Central Bank of Ireland Brexit FAQ
- EEA = EU member states plus Norway, Iceland, and Liechtenstein. [↩]
As a Swiss resident, I’ve already seen some friends have their investments trapped in the recent EU/Swiss spat.
Personally, I hope to avoid all problems by investing in the UK/RoW via Interactive Brokers UK and in the US via a US broker.
Any idea regarding funds domiciled in Jersey?
Really helpful! Thank you TA.
Reassuring. I predict only 4% of funds will be affected.
Somebody give TA a medal. Well done sir.
I have been vaguely wondering about this but hadn’t crystallised the concern – I suppose at best thinking that if there was a serious problem then ii/selftrade/FT would have warned me.
Good to hear you have looked into the bridges and seen lashing and no dynamite.
I have some pre-UCITS USA ETFs which I now can’t trade properly in a UCITS world (good ol’ EU protecting my interests? If only – inserting protectionism to boost ‘national champions’, more like) – only sell – and that hasn’t been the end of the world. Much as I quite liked them, I think the withholding taxes etc make them unattractive anyway. Talking of withholding taxes, you didn’t mention them, but I don’t believe there are any EU-level ones nor Irish ones so I assume that is not a worry.
I would have a reasonably large cash fund as a retiree so as to ride out the storm
Wether it should be any larger than one required for a market crash is a moot point
Probably not as these are same magnitude problems
We seem as a free society remarkably able to bounce back -in fact troubles seem to stimulate all sots of positive outcomes
Stay the course with a cash anchor to windward-in the words of the great John Bogle!
@ Money Mongoose – what happened to your friend’s funds?
@ Borderer – I didn’t look into this and didn’t come across anything on it. As a Crown Dependency it makes sense that UK investors shouldn’t experience problems with Jersey dommed funds.
@ Fire v London – Thank you for the kind words! Didn’t come across anything on withholding taxes either. Neither Ireland nor Luxembourg impose withholding taxes on UK investors – from memory the treaties are bilateral but I’m asking a lot of my memory there so I’d need to check to be sure.
Looking into further myself, as Jersey s not a member of the EU, I’m happy that any Jersey domiciled funds should be ok.
As with many IFA’s I have clients who have relocated to the EU over the last 20 years, all to France. I’m currently ‘passported’ to France, so I can still speak to them about their UK-based pensions and investments. I understand that I probably won’t be able to from 1 November, but that there might be a temporary window as the trade deals are negotiated.
Although Monevator readers may buy ETF’s, not so many IFA’s have recommended them to clients (as they are seen as ‘complex investments’, and “what’s wrong with Fidelity’s FTSE All-Share Tracker anyway?”), although I have on occasion. My main concern with ETF’s is anecdotal ‘evidence’ of a looming liquidity problem, particularly in the fixed-income sector, rather than Brexit.
Thank you for the detailed post, this is more or less exactly what I was looking for! The AJ Bell link is also useful.
As somebody now based in the EU but with a UK stock trading account, my own dilemma is about capital controls in the event of a very disorderly Brexit. Should I transfer my Dublin-domiciled holdings from my UK stock trading account to my EU stock trading account? Thoughts/advice appreciated…
Re: trapped funds, the broker suggested either waiting until the issue was resolved between CH/EU or magnanimously agreed to transfer the positions out to another broker (for a cost).
Great article, thank you. My own personal concern is the possibility of capital controls in the UK if things get really grim (I now live in the EU). I’m therefore wondering whether to shift some of my Dublin ETF holdings from my UK stock trading account to my EU stock trading account. It would be rather annoying not to be able to access my funds in case there is a serious run on the pound..
So you are worried about capital controls first, then a run on the pound? I think the opposite sequence would be more likely ( and was the situation prevailing when I was a younger man :).
If you live in the EU shouldn’t you be matching your assets and liabilities in terms of currency.
In terms of coercive financial measures, think the risk is no higher in the UK than the EU, excluding perhaps the possibility of a strongly ideological government.
Once you let your imagination run there are always risks you can’t mitigate. Even cash or gold under the bed could be negated ( eg illegal to hold or sell gold, change in banknotes with restrictions on how much can be converted). Think Cyprus and India.
I think this is wholly wrong. The UK is essentially, mildly, “in play” at the moment. The chances are everything will work out okay (not optimal, but work out far from chaos or something very dark) because we’re even still a mostly functioning mature Western democracy and things usually do, but the risk of extraordinary developments on a short-term horizon is IMHO far higher than Europe — we probably face a constitutional crisis in the next two months and the EU at worst perhaps a recession, and maybe some tricky decisions due to negative yields (which would be solved at least in that short-term if the Germans borrowed and spent).
Of course, just my opinion, but as I see it there several bad cards shuffled into the deck that wouldn’t be here if it weren’t for Br*xit, and I wouldn’t be complacent about it.
Well I wasn’t offering this as a prediction, just a survey of potentialities. Panic is always the wrong reaction. It depends on your timescales. Any near term need for cash equals cash. A bit further, short duration UK gilts. The impact to your investments is via sterling. I just don’t know. But assuming I grow a little bit older my money is on equities, but not the S&P 500. Stuff that earns. We are all in this together after all.
This is very reassuring, much appreciated. How do ITs fit into the puzzle? I’m thinking of buying some (along with some Irish ETFs). I’m looking forward to an inaugural sister article from the Activator as to how to profit from a no-deal Brexit. The silver-lining to the grey clouds as it were. That would be very timely for my current, very particular, set of circumstances..
@ The Rhino, good shout, amongst all of this Brexit bleakness we should try to keep an eye on the opportunities too – ‘while there’s blood on the streets… etc’. Much as that makes it all sound rather distasteful, we must be honest with ourselves (at least), many of us are searching for that silver lining.
Personally, primarily as a result of a change in personal circumstances, I’ve just sold my primary residence – with at least half an eye on a potential post-brexit property crash, and if/when I buy, I will no doubt take on a voluntary mortgage so as to have access to funds in order to have the opportunity to buy into any falling stock market.
I’d be fascinated to hear what TA/TI think of such strategies; or any other of you fine contributors…
@MM – Seismic events do tend to offer up economic opportunities if you’re in a position to take advantage of them. Its just a question of figuring out what they are and then acting in a timely fashion.
I’ve done almost the equal but opposite to you! I’ve doubled-down on housing by upsizing (the opposite bit) and got the voluntary mortgage (the equal bit).
@ The Rhino – interesting, I was actually being overly concise, so our strategies are more similar that different. I had two properties, have sold one, holding the other (hedging my bets!) and may up-size into a single property but with funds to spare for a Buy-to-Let, depending on how things work out. Re-assures me to hear we’re not miles apart on strategy; if the Buy-to-let numbers don’t stack up, that’s more funds either to pay down mortgage or plough into stocks.
It’s a good dilemma to have – grateful I caught the FIRE bug a few years back – a fair way off from the RE bit, but I’m starting to feel the snowball effect from having essentially paid off my primary residence.
The questions that are on my mind are:
How do I get a negative interest rate mortgage?
What will negatives rate mortgages do to house values?
Should I dump my BTLs and buy trackers, or mortgage them and invest!
How do I get a second passport.
And, I wish I’d diversified away form sterling!
I take heart that fund manager Gina Miller, whilst underweight UK, has increased her funds exposure to UK equities. All this through Vanguard and iShares ETFs.
you may like this Bloomberg podcast on negative interest rates:
This is an area that needs more discussion!
My advice is not to try to second guess the market if it goes into turmoil. You might get lucky, chances are you will get your fingers burnt.
I remember at the start of the financial crisis a number of colleagues who were very knowledgeable about finance and banking in particular telling me I should buy bank shares as the prices were irrationally low and the doom stories were overblown. Bank shares subsequently went a hell of a lot lower and have still not recovered the prices they were buying at.
iShares confirmed that their Irish, German and Luxembourgian UCITS funds are registered with the FCA under the TPR.