The UK exited the EU on 31 January 2020. By virtue of the transition period in the Withdrawal Agreement, EU law will continue to apply in and in relation to the UK only until the 31 December 2020. The EU Treaties, EU free movement rights and the general principles of EU law will then cease to apply in relation to the UK. EU regulations and directives transformed into domestic law on the basis of the European Communities Act 1972 will only continue to apply in domestic law (by virtue of the European Union (Withdrawal) Act 2018 (2018 Act) insofar as they are not modified or revoked by regulations under the 2018 Act.
For details of the 2018 Act please click here.
This briefing note advises readers on the immediate considerations and anticipates how Brexit will impact on financial services law and financial services providers more widely.
Following the transition period, the terms of the UK's relationship with the EU will be governed by the terms of the Free Trade Agreement (FTA) that is yet to be substantively negotiated. There is no clear picture as to what the financial services landscape will look like under the FTA and as such, it is strongly recommended that financial services providers likely to be affected by Brexit follow the practical steps discussed below in order to best mitigate any potential disruption to the financial services sector caused by Brexit.
Practical steps to take now
While some businesses likely to be affected by Brexit have started to identify potential areas of risk and impact and plan staff and customer communications, the future UK-EU financial services landscape will not become clearer until the terms of the Free Trade Agreement are finalised. Therefore, these businesses will need to set aside further time and resources to assess how they will be impacted as more information becomes available in the coming months.
Impact on financial services providers
Currently, a financial services provider (such as a credit institution (bank), payment institution, electronic money institution, insurance company or an investment firm) established in any EU member state or EEA member state my exercise a 'passport' to provide its services from its home state to any other EU member state or EEA member state. It is for this reason that many non-EU financial services providers have established subsidiaries in a member state of the EU so that they can access the markets of the EU and EEA.
Following the expiry of the transition period financial services firms will no longer be able to exercise passporting rights, instead, the Political Declaration on the future UK-EU relationship stated that the UK and EU will have equivalence frameworks in place, such as the framework that currently exists under MiFID II.
These frameworks may form the basis for assuring a level of continued access by UK firms to the EU markets – however this is not equivalent to the passport and requires the establishment of branches for the provision of services to retail clients. Not all European financial services regulation contains equivalence frameworks and under the current landscape, a significant number of financial institutions, such as credit institutions and insurance firms, will lack equivalence access to EU markets when the transition period expires. The ability to clear euro-denominated payments in the UK may also be affected.
There may, in the longer term, be new opportunities if the UK secures deals on services with countries outside the EU. However, EU agreements with third countries and the recognition of other third country regimes will require replication in UK law.
The wider impact on financial services law and regulation
Outside the EU and EEA the UK will be free to depart from the current EU-based regulatory position. That might allow for liberalisation (in areas where innovation was to be fostered or in the area of pay and bonuses for bankers) but it might well see some more strict regulatory requirements (such as the more onerous bank capital requirements sought by the UK in previous discussions within the EU).
UK financial services firms may, as the situation becomes clearer, need to contemplate creating a subsidiary which becomes independently authorised in a continuing EU state in order to continue conducting their European business so far as possible; others may contemplate moving from the UK. To the extent permitted, UK financial services firms may also need to contemplate opening an authorised branch in an EU member state in order to access EU markets and provide financial services to retail clients under the relevant equivalence frameworks.
Financial services firms based in the EU that currently operate in the UK will also need to consider whether they need to open authorised branches as there can be no certainty of being able to continue operations after the transition period.
Under the Political Declaration, the UK and EU aim to complete the assessment of each other's equivalence frameworks before the end of June 2020, at which point the future UK-EU financial services landscape may become clearer. We intend to update our guidance in this area as further details emerge.
Please contact us if you would like to discuss the implications of a Brexit for your financial services business.