What the Brexit Vote Means for Biotech

What the Brexit Vote Means for Biotech by Mickael Marsali

With uncertainty spreading throughout much of Europe, the Brexit vote has left many industries in a panic over what’s to come. Voters have effectively altered the future of many countries economies across Europe, though they may still not fully understand the gravity of their decision.

What the exact implications of the vote will be for biotech, a growing industry in the UK, are still hard to predict. There are a few key concerns rising to the top of people’s minds, but overall, the sector remains optimistic that minimal changes and disruptions will need to take place.

One concern for not only the UK, but Europe as a whole, will be how the European Medicines Agency’s (EMA) regulatory structure will operate separate from the EU. The EMA, based in London, has been in charge of the central marketing of medicines in both the European Union and the European Economic Area (EEA). The MHRA, UK’s primary drug regulator, have played an increasingly authoritative role within the EMA, being responsible for nearly a third of its regulatory work.

Many are worried about the fate of the unified patent initiative (run on European basis) as well as the future flow of investments. Until now, the UK has offered investment incentives, and freedom of employment, but this will certainly change in light of the recent vote.

Many companies like F2G, an antifungal company, have taken advantage of these incentives in the UK and would like to continue doing so. The CEO, Ian Nicholson has expressed his concern, exemplifying that almost a quarter of his workers are from other countries within the European Union. He claims that not only his company, but the market as a whole, relies on the freedom of these individuals. And he believes this reliance will only increase moving forward. The Brexit vote has put an unexpected wrench in this shift.

As a whole, there is reason to believe the Brexit vote will not affect the Life Sciences sector of the market too drastically; however, it will still be a fairly rough patch for many in the coming weeks and years. We can certainly expect small changes to legislation, but ultimately the UK will benefit from not changing anything too drastically as this will require time and resources they simple don’t have.

The Brexit & Our Economy

The Brexit & Our Economy by Mickael Marsali

With the much anticipated June 23rd referendum fast approaching, voters will soon decide if the Britain will, in fact, leave the European Union. To the surprise of some, the polls are showing nearly an even split amongst eligible voters. Britons starkly disagree as to the Brexit’s potential geopolitical, economic, and social impact. Its economic consequences, however, seem to sit at the heart of this discord and is the subject of impassioned rhetoric from both sides. Unsurprisingly, the majority of Britons simply want to pursue the option that would leave themselves, and the nation, better off financially.

While the long-term economic impacts of the Brexit are in dispute, it is nearly impossible to argue against the immediate economic losses that would occur as a result of leaving the EU. John Greenwood, who serves as a Senior Economist at Invesco Perpetual, notes that the negotiation period with EU officials would last a minimum of two full years, and many experts believe this time period could be closer to a decade.  The UK would be forced to establish new trade agreements not only with the European Union but all states Britain trades with under EU membership. The Bank of England has publicly warned that the Brexit is the biggest risk to the nation’s economic well-being.

Although more controversial, the majority of economists have concluded that Britain leaving the European Union will negatively impact the UK economy in the long-run. A recently released study from the Centre for European Reform highlights the benefits of EU membership, especially as it relates to trade gains. The study found that British trade with the European Union has been more than 50% higher than it would be as a non-member nation.

This trade loss would be partially offset by the nearly £9 billion Britain gains by eliminating the yearly contribution to the EU budget. However, most economists agree, to the dismay of Brexiters, that leaving would severely hurt FDI (foreign direct investment). Greenwood notes that the European Union has served as the UK’s largest source of foreign direct investment over the last five years. The economist warns the Brexit would make the financial services sector especially vulnerable.

Greenwood also expresses concern over the UK’s sizeable account deficit, which is equal to 7% of the GDP.  He predicts that, if the Brexit were to come to fruition, the sterling would continue its depreciation.

FCA Survey Concludes Funds Generally Do What They Say, but There’s Room for Improvement

FCA Survey Concludes Funds Generally Do What They Say, but There's Room for Improvement by Mickael Marsali

Investors generally make decisions on whether to invest in authorised investment funds based on a combination of marketing material, disclosure material, and investment mandates. Obviously, this means it’s paramount this information is accurate, up to date, and understandable.

In April 2016, the UK’s Financial Conduct Authority (FCA)an independent regulator funded entirely by the firms they regulate but responsible to the Treasury and Parliamentconducted a thematic review to assess whether UK authorised investment funds and segregated mandates are operated in line with the expectations investors’ reasonably come to utilizing this information.

Inspired by their Business Plan 2015/16, the FCA decided to cover 19 UK fund management firms responsible for 23 UK authorised funds and four segregated mandates, all available to retail investors and using active investment strategies.

They chose not to purusue more segregated mandates simply because the risks associated with mandates are less adverse than in funds, where oversight is carried out by the fund manager rather than directly by investors.

The goal of such a review is three fold; they want to ensure fund management firms:

  1. ensure product descriptions are correct and straightforward
  2. properly oversee funds over time, including funds that are no longer actively marketed
  3. actively identify inappropriate sales by monitoring the distribution channels they select.

Overall, the FCA found that most fund management firms are taking the proper steps to meet investors’ expectations while not exposing them to any undisclosed investment risks. However, there were a few key areas for improvement.

Clarity of product descriptions

When describing how a fund is managed and the associated risks, fund management firms must be clear and consistent between marketing documents and the fund’s disclosure documents (key investor information document and prospectus). They should provide a thorough explanation of the fund’s investment strategy, as well as specific information about the aims and asset allocation of the fund.

They found that seven out of the 23 funds’ reviewed had key investor information documents (KIIDs) without clear descriptions of how they were managed. In three of these funds, the investment strategy was constrained, and there was limited freedom in relation to a benchmark. In one fund, the jargon used was most likely not understood by most retail investors.

Providing adequate oversight and governance

It’s the responsibility of the fund manager to monitor and review stated investment objectives and ensure that the fund is being managed in accordance with its objectives. Unfortunately, when funds cease to be actively marketed, there is a risk that managers will no longer provide the same level of attention and service to those funds, neglecting to take the appropriate steps when necessary.

Of the four funds reviewed that were not being actively marketed, none of them had a clearly disclosed investment strategy. And in one case, the FCA rules that the firm’s governance did not ensure the fair treatment of customers. Each of these funds had notable issues.

Ensuring appropriate distribution

When distributing funds through a third party, the fund management firm takes on certain responsibilities as product providers. Managers must carefully monitor the distribution of their funds, ensuring they receive and process relevant sales and customer information.

Of the 19 firms reviewed, only five were found to be taking active steps in identifying trends that could indicate inappropriate sales. Two funds were available on execution-only platforms when the firm had planned for the funds to be only available with advice.

Thoughts from the FCA

As Megan Butler, FCA director of supervision for investment, wholesale and specialists, explains, “The industry needs to consider how it communicates when funds are linked to financial benchmarks.

“It is also vital funds keep investment practices under review so they match their stated aims and strategy, irrespective of whether the fund is still actively marketed because investors base their decisions on this information.”

The FCA will be writing to all the firms in the sample, providing individual feedback, requiring changes wherever they found instances of ineffective management of risk that could lead to poor customer outcomes. All fund management firms in the UK should consider the findings in this report and review their arrangements accordingly.

Powered by WordPress & Theme by Anders Norén