On 29 March 2017, the UK Government served formal notice under Article 50 of The Treaty on European Union to terminate the UK's membership of the EU (following the June 2016 UK referendum on EU membership). Based on Article 50, the EU Treaties shall cease to apply to the UK and the UK exit will take effect in March 2019. The draft version of the withdrawal agreement between the UK and the EU, published in March 2018, reflects political agreement on the terms of a ‘transition period’ after March 2019. Under this agreement, financial services firms in the UK would keep passporting rights until 31 December 2020.
The Government position has not materially changed since the publication of its White Paper which indicates that it is unlikely that Brexit will reflect any of the current models (Norway or Switzerland) and the aim of the Government continues to be a bespoke deal in the form of a free trade agreement.
This briefing note advises readers on the immediate considerations and anticipates how a Brexit will impact on financial services law and financial services providers more widely.
Practical steps to take now
While the terms of Brexit is still in progress, businesses likely to be affected by Brexit need to start to identify potential areas of risk and impact and plan staff and customer communications. Those businesses will need to set aside time and resources for further analysing how they will be impacted as the picture becomes clearer. Regulators in the UK and the EU have stated that the progress in the preparations of financial institutions for the departure of the UK from the EU is inadequate.
Impact on financial services providers
Currently, a financial services provider (such as a credit institution (bank), 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.
Although the Prime Minister has indicated a desire for a deal with the remaining members of the EU (the 'EU27') and there are voices on both sides of the Channel that believe that a deal on financial services is important to the UK and the EU27, there is still no indication that there will be a deal with the EU27 or what form it will take.
There were suggestions that the EU's proposals on 'third country firms' with equivalent regimes contained in MiFID II might offer a mechanism 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. The ability to clear euro-denominated payments in the UK may also be affected.
The Government has signalled that it is still pursuing a free trade agreement for financial services citing the recent comprehensive economic trade agreement entered into between the EU and Canada.
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.
However, at this stage, progress remain slow with a transition period agreed but no progress on what form of free trade agreement will be entered into, if any, in relation to financial services.
The UK envisages complete alignment of UK and EU financial services regulations on "day 1" of Brexit. . However, it is unclear at this stage whether the EU27 will agree to this type of bespoke arrangement with the UK. We intend to update our guidance in this area as details of any deal on financial services becomes clearer.
Please contact us if you would like to discuss the implications of a Brexit for your financial services business.
This article is part of our Brexit series.