Courtesy of Mete Feridun
In March 2018, the UK and EU27 reached an agreement on the terms of a transitional period following the UK’s withdrawal from the EU. However, the terms of this deal are conditional on both sides agreeing to a final withdrawal treaty (“Withdrawal Agreement”). Since Boris Johnson’s ascension to Prime Minster in July, this prospect has grown increasingly unlikely, and the possibility of a no-deal Brexit now threatens the continuity of cross-border financial services between the UK and EU.
According to the transitional agreement, the transition period begins the day the Withdrawal Agreement is signed, and lasts until the end of 2020. During this time, EU law would remain applicable in the UK. Therefore, financial services firms and investment funds would continue to enjoy passporting[1] privileges between the UK and the EU. However, in the event of a no-deal Brexit, there will be no implementation period and the UK will immediately become a ‘third-country’ in relation to the EU. As a result, EU financial services firms will no longer be able to passport into the UK and vice versa.
Absent the continuation of passporting privileges, firms that currently operate in the UK and EU27 must obtain authorization in both jurisdictions to carry on regulated activities. However, the UK has contingency measures in place that will enable the EU27-based firms to continue their UK activities post-Brexit. The objectives of these contingency measures are threefold: first, ensure that the UK has a functioning and resilient regulatory framework in place that can avoid market distortions and risks, and maintain overall financial stability in the UK; second, provide firms with broad transitional relief regarding changes to their regulatory obligations; and third, set out changes to obligations on firms that will apply once the transitional relief falls away. These measures include a Temporary Permissions Regime (TPR), a backstop that is designed to allow firms to continue their activities in the UK for a maximum of three years if the Withdrawal Agreement is not ratified.
The EU has no such temporary arrangement in place and does not plan on adopting any other contingency measures, other than those designed for UK central counterparties and central depositories. This means that UK financial services firms will lose their ability to passport into the EU27, and may even lose their ability to meet contractual obligations with EU27-based clients.
In the absence of an EU-wide no-deal Brexit transitional arrangement for market access, some EU27 countries have unilaterally adopted measures that will allow UK firms and funds to continue operating in their respective jurisdictions with minimal disruption. Such measures may allow inbound UK firms to continue operating within the scope of their current permissions for a limited period after the exit day while seeking full authorization.
Germany, for instance, plans to adopt a temporary regime for UK banks, investment firms, and insurance undertakings. This plan would allow the passport regime to continue to apply, fully or partially, for up to 21 months after the exit day for UK firms, subject to certain conditions. Italy has arranged an 18-month transitional regime to allow UK banks to carry on banking and payments activities, and investment firms to provide investment services.
While other EU countries may lack a comprehensive transition regime, preparations are still being made to ensure contract certainty and continuity for certain financial services activities. For example, the Netherlands puts in place a transitional regime for UK-based investment firms that will allow these firms to continue operating until January 2021 in the event of a no-deal Brexit. However, the Dutch have no such regime for banks, regulated markets, and insurers.
France plans on ensuring the continuity of existing insurance contracts with UK companies after UK firms lose passporting privileges. France will also continue to recognize the UK interbank payments and settlement systems.
Sweden is planning a transitional regime for investment firms in order to maintain access to capital services for Swedish firms, while Denmark plans on allowing cross-border investment services in the case of a no-deal Brexit. Spain, on the other hand, allows authorizations previously granted to remain valid only until the end of the year, and has no plans to implement any transitional arrangements.
While the broader repercussions of the UK’s withdrawal from the EU remains uncertain, financial services and investment firms should prepare for all eventualities, including a no-deal Brexit. Depending on the jurisdiction they operate under, they should either seek authorization, or establish a new, EU-based, subsidiary to carry on their operations post-Brexit.
[1]Passporting allows a firm registered in the European Economic Area (EEA) to do business in any other EEA state without the need for further authorization from each country.
