Ruin's wheel has driven o'er us,
Not a hope that dare attend,
The wide world is all before us -
But a world without a friend.
Strathallan's Lament, Robert Burns, 1787
Our opening quote for this newsletter, the final verse of Strathallan's Lament by Robert Burns, is here for two reasons. Firstly, it seems to be an accurate summary of the fourth round of Brexit negotiations, more on which below, and secondly it is an appropriate introduction to our historical trivia at the end of this newsletter, bringing to a close our series on spirits with a trip up north for some whisky.
Our previous newsletter was sent out just as the fourth round of Brexit technical negotiations began. We were not optimistic that a breakthrough would be achieved and indeed, as anticipated, the discussions concluded on 5th June with no obvious sign of any progress.
The frustration from the EU side was evident in Michel Barnier’s statement following the end of this round of negotiation, the key section of which is:
"We engaged in this negotiation on the basis of a joint Political Declaration that clearly sets out the terms of our future partnership.
- This document is available in all languages, including English. It is a good read, if I may say so.
- This declaration was negotiated with and approved by Prime Minister Johnson.
- It was approved by the leaders of the 27 Member States at the European Council in October 2019. It has the backing of the European Parliament.
- It is – and it will remain for us – the only valid reference, the only relevant precedent in this negotiation, as it was agreed by both sides.
Yet, round after round, our British counterparts seek to distance themselves from this common basis."
This was emphasised and expanded upon in a speech by Barnier on 10th June to a plenary session of the European Economic and Social Committee. A key point was that the EU "cannot accept the UK's attempts to cherry-pick parts of our Single Market benefits”.
The section of the speech that expands on this is of significance to the real estate investment management industry as the four areas outlined present varying levels of challenge:
It is looking to “pick and choose” the most attractive elements of the Single Market – without the obligations.
For example, the UK demands:
- To maintain almost complete freedom of movement for short-term stays for UK service providers;
- To maintain a system for the recognition of professional qualifications that is as complete and broad as the one we have in the European Union;
- To have its customs rules and procedures recognised as equivalent, while refusing to commit to the necessary compliance checks and monitoring, or alignment to EU rules where necessary.
- To be able to co-decide with the Union on decisions relating to the withdrawal of equivalences for financial services, when they know these are – and must remain our own, autonomous decisions.
We cannot allow, and we will not allow, this cherry-picking.
The perception that the UK is seeking to backtrack on its existing commitments, backed up by comments from UK politicians, that the Withdrawal Agreement has "defects that that need to be corrected” and that the Political Declaration can be ignored because it is “not legally binding” is damaging not only for these negotiations but for other treaties too, as the UK is becoming increasingly regarded as an unreliable partner.
What happens next?
Last Thursday, 11th June, it was announced that a High Level Meeting between the Prime Minister and President von der Leyen, President Michel and President Sassoli would take place by video conference on the afternoon of Monday, 15th June. Depending upon what time you read this newsletter, it may or may not have taken place. It was also announced that weekly negotiation meetings will take place for five weeks from 29th June.
On Friday, 12th June, the EU accepted that the UK will not seek an extension to the Brexit transition period.
In our previous newsletter, we promised to provide a comprehensive blog on the state of play following the fourth round of technical negotiations. In view of the complete absence of progress, we will leave this until July in the hope that there might be something to write about.
In our blog before the EU referendum in 2016, in which we made the case to “remain” we cited the influence on financial services that the UK had achieved through the role of Sharon Bowles MEP as the highly effective Chair of the EU Parliament Economic and Monetary Affairs Committee from 2009 to 2014 and through the appointment of Jonathan Hill as EU Commissioner for Financial Stability, Financial Services and Capital Markets Union. Hill’s appointment was achieved in the face of significant opposition (being something of a Euro nerd, John listened to the appointment hearings). Hill resigned immediately after the Brexit vote but progress on the Capital Markets Union (CMU) has continued. We have long said that the progress on the CMU would mean that the UK would leave the EU just as the full benefits for the financial services industry emerged. It is therefore slightly ironic that in the week that the UK determined definitively that it would exit the single market at the end of the year, the latest blueprint for the CMU was published.
A New Vision for Capital Markets Union
We covered in early May that Irene Tinagli, chair of the European Parliament Committee on Economic and Monetary Affairs (ECON), emphasised the importance of accelerating the Capital Markets Union (CMU) to encourage investment.
On the 10th June, the Final Report of the High Level Forum on the Capital Markets Union A new Vision for Europe’s capital markets was published.
You can find it here.
The High Level Forum, which was set up by the European Commission in 2019, is a panel of senior figures from the financial services industry. It published its interim report in February. The final report makes seventeen recommendations, which are grouped into four clusters:
A. the financing of business,
B. market infrastructure,
C. individual investors’ engagement,
D. obstacles to cross-border investment.
In the first, on he financing of business, one area that is of interest to us are the comments on European Long Term Investment Funds (ELTIFs). When we last covered ELTIFs in this newsletter in January, we observed that any news about them brings on a brief moment of nostalgia as our first newsletter as John Forbes Consulting LLP in July 2013 concentrated on the then recently published draft legislation for a new EU investment fund regime, the ELTIF. We queried whether the EU’s hugely lofty ambitions for what it could achieve would be matched by a vehicle up to the task. We subsequently described it as a superhero without a discernible superpower. In January we harshly, but accurately we feel, likened it to the Nosferatu, neither truly dead nor truly alive, but glimpsed occasionally in the darkness. The report recommends that (i) the Commission proposes targeted amendments to the European Long Term Investment Funds (ELTIFs) regulatory framework and (ii) Member States simplify tax rules applicable to ELTIFs and/or apply preferential tax treatment for ELTIFs.
The most dramatic proposal is in individual investors’ engagement, where the report supports the introduction of auto-enrolment systems to stimulate adequate pension coverage across all Member States.
The section on obstacles to cross-border investment, the report recommends that the Commission:
The Commission has launched a call for feedback from stakeholders on the report, which is open until 30 June.
Another element of the CMU that we have been following in this newsletter has been the review of the Alternative Investment Managers Directive (AIFMD). A package of changes, the key element of which was the introduction of a uniform definition of “pre-marketing” of funds, was originally published in draft in March 2018, and after a slightly tortuous process, the EU Finance Ministers adopted the final text on 14th June 2019. The changes come into effect on 2nd August 2021.
- puts forward a legislative proposal to introduce a standardised system for relief at source of withholding tax based on authorised information agents and withholding agents;
- strengthens ESMA and EIOPAs’ mandate to enhance EU supervisory convergence, including by reforming their governance and strengthening their powers and toolkits as well as by entrusting them with wider powers in crisis management and ensuring that they are granted adequate resources. To that effect the Commission should review the relevant sector-specific legislation as well as the founding Regulations of ESMA and EIOPA.
Whilst this process had been underway, KPMG had been appointed to undertake a more general review of the AIFMD as part of the CMU. KPMG, who one suspects were being paid by the kilogram, handed over an impressive 426 page report which was published in December 2018. The European Commission have obviously taken a while to digest it and seek other feedback, as its own report to the European Parliament and the Council was only published last Thursday, 10th June. It condenses the bumper KPMG effort plus the other research down to ten pages.
You can find it here.
The Commission report makes general observations rather than any recommendations, so it remains to be seen if much use will be made of it. We will provide an update if anything happens.
EU sustainability reporting
We covered this in our newsletter in early May (see "European Union Environmental, Social and Governance disclosure rules” in the newsletter here).
This has the potential to be hugely significant for the real estate industry. Fund managers within AIFMD will be caught directly. Others may be caught indirectly through having clients that are regulated under the Solvency II and IORP Directives.
The reporting provisions are potentially highly problematic for real estate as an asset class as they appear to have been drafted with funds investing in a portfolio of securities in investee companies in mind.
The consultation runs until 1st September 2020. John is part of the group that will be working on the Association of Real Estate Funds (AREF) response to the consultation. AREF is looking for others with views on the subject to contribute too.
You can find the regulation here and the consultation here.
AREF Webinar: COVID Forum #5 “The Road to Recovery"
Webinar #5 of this series that John is chairing took place on 9th June. Thank you to the panelists:
You can listen to the webinar here.
- John Hollick, Managing Director at UBS
- Tim Munn, CIO at Mayfair Capital
- Paul Conroy, Group head of Real Assets at Aztec Group
- Mike McKell, Head of Real Estate Secondaries, Alternatives at Tullett Prebon
Webinar #6 will take place on 30th June. You can find details here.
Cost Transparency Initiative
We covered this in our previous newsletter. We have now put all the links on a CTI page on our website, which you can find here.
Forthcoming events at which John is speaking are as follows:
Discussion on the merits of a proposed UK Professional Investor Fund
16th June, 9.15am
Details and registration here.
AREF/ INREV Open End Fund Pricing Project Briefing Webinar
18th June, 10am
Details and registration for AREF members here and for INREV members here.
ICAEW seminar - Covid 19 and real estate investment management
22nd June, 11am
Details and registration here.
AREF COVID Forum #6 - The Road to Recovery
30th June, 11.15am
Details and registration here.
Institute and Faculty of Actuaries webinar - Challenges of including illiquids in DC Pension Funds
9th July, 3pm
Details and registration here.
London Stock Exchange Investment Fund Conference 2020
John will be speaking about real estate funds at this conference, which has been postponed until 4th September, although it is not clear that physical conferences will have restarted by this date. You can find details and register here.
IPF webinar on open ended funds
John will be moderating this webinar. Details will be available shortly.
Historial trivia - whisky
Freedom and Whisky gang thegither
The Author's Earnest Cry and Prayer, Robert Burns, 1786
As lockdown starts to ease and the pubs will soon be reopening, we are bringing our history of spirits series to a close with the greatest of them all, whisky, uisge beatha, the “water of life". What better way is there to embark on this than the famous quote from Robert Burns? As mentioned at the start of this newsletter, our opening quote, Strathallan's Lament, also has a whisky connection. The Strathallan concerned was William Drummond, fourth viscount of Strathallan. His final sacrament, delivered as he lay dying on the battlefield at Culloden, was oatcake and whisky rather than the more usual bread and wine.
So, to the whisky itself. This, the greatest of spirits, comes from the Highlands of Scotland. For those who prefer a more peaty taste, whisky is also distilled on many of the islands off the coast of Scotland. Although whisky is also produced in the lowlands of Scotland, as Robert Burns himself noted, this is a “most rascally liquor” and does not therefore compare to the finer options available further north. Like blended whisky, it should only be drunk in an emergency or if you are adulterating your whisky with other products. This is something of which we generally disapprove, apart from two cocktails, the “Old Fashioned” and the "Whisky Mac". The latter, which has a splendid warming effect in winter, was invented in India by a MacDonald although there is some debate as to whether it was Colonel Claude MacDonald or Major-General Hector “Fighting Mac” MacDonald. The latter was a fascinating, if slightly controversial, figure whose historical trivia we must, in view of current sensitivities, leave you to research on your own.
Friends and former colleagues have over the years tried to convince John that alcohol distilled outside Scotland is also whisky. He generally ignores such nonsense.
Although whisky is much older, the industry as we know it today developed immediately after the Excise Act of 1823, which made legal distilling much easier. Despite the longstanding feud between the Gordons and the Forbes, we must at this point raise a dram to George Gordon, fifth Duke of Gordon, who encouraged his tenant, Mr George Smith, who had been running an illicit distillery on his Upper Drummin farm by the river Livet, to apply for a licence. George, and his son John Gordon (J.G.) Smith, obtained the first licence issued under the Act and the distillery opened in 1824.
There were, of course, legal distilleries in the Highlands before the Excise Act and the Glenlivet, and our particular favourite, the Glen Garioch was licensed in 1797. The distillery is at Old Meldrum, north of Inverurie in Aberdeenshire, near the site of the Battle of Harlaw in 1411. This was one of the bloodiest battles in Scottish history, when the families of North East Scotland led by the Earl of Mar defeated Donald Macdonald, Lord of the Isles. Alexander Forbes, subsequently first Lord Forbes, played a decisive part. Mar’s force also included the provost and burghers of Aberdeen, a rare occasion of MacDonalds and burghers facing each other in battle. We think that the defeated MacDonald army contributed to the rich quality of the local peat, so we always thank them when we raise a glass of the Glen Garioch.