Andrew Hallgarth and Trystan Tether
Partner at Bird & Bird’s
Discuss how Brexit might impact Financial Services
Following the vote on 23 June 2016 for the United Kingdom to leave the European Union and the ensuing political upheavals, it is likely that there will now be at least some period of reflection as the Government decides on the shape that it would like Brexit to take.
Practical steps to take now
While the terms of Brexit will be worked out in the coming months (and, with regard to the detail, years), businesses likely to be affected by Brexit should 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 analysis of how they will be impacted as the picture becomes clearer.
If some of the potential alternatives for Brexit are more attractive than others for a business, it will be important to consider how to get that across to decision makers – whether by direct lobbying, shaping the lobbying of trade associations or otherwise. Of course, entirely new approaches could emerge – for example, the mooted "F4" grouping of financial services centres (UK, Hong Kong, Singapore and Switzerland) could lead to a bespoke arrangement for financial services between the EU and these centres.
It is probable that future legislation relating to Brexit will address key issues as to how terms such as 'the European Union' and 'member state' in contracts should be interpreted, but it will nonetheless be prudent to look at precedent contracts to future-proof them, in particular in case a one-size-fits-all legislative approach does not fit with the particular precedent. For example, banks may consider it prudent to expressly address the 'bail-in' provisions that are, currently, automatically included if English law is chosen but which would not necessarily apply once the UK ceased to be a member of the EU.
Impact on financial services providers
Currently, and for so long as the UK remains in the EU, 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 may 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 at least one subsidiary in a member state of the EU to enable them to access EU/EEA markets.
Once Brexit occurs, unless the UK has secured the status of an EEA state or negotiated for an equivalent regime with regard to passporting, financial service providers in the UK will cease to have the automatic right to provide their services in the EU/EEA. Conversely, EU/EEA financial service providers will no longer be automatically able to provide services into the UK. Both the UK and most EU countries have some arrangements which enable non-EU/EEA parties to provide some financial services into their jurisdiction, but these are typically limited and certainly a lot more restricted than existing passporting rights.
At present, it is unclear whether the UK will become an EEA state (since, to date, such status has required the acceptance of 'freedom of movement' and a financial contribution – and the limiting of both was a central feature of the 'leave' campaigns).
There have been 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 a branch in any jurisdiction in which services are to be provided to retail clients.
The ability to clear euro-denominated payments in the UK will also be affected unless the current arrangements are incorporated into any new arrangements between the UK and the rest of the EU.
The wider impact on financial services law and regulation
If the UK leaves the EU but it is agreed that it will have the status of an EEA state (whether on the same terms as Norway or in a bespoke arrangement), then there is likely to be very little change and the UK's legislation and regulation would evolve to ensure continued compliance with the requirements of the EU.
If the UK leaves the EU without securing EEA-equivalent status, then the UK will be free to deviate from the EU rules and requirements. This may allow for liberalisation (both in areas where it was felt that innovation should be fostered or that EU requirements were unduly restrictive for the UK market and in areas where it was thought necessary to encourage key people to locate in the UK – such as pay and bonuses for bankers) but it might well also see some stricter regulatory requirements being imposed (such as the more onerous capital requirements for banks sought by the UK in previous discussions within the EU).
Post-Brexit, in order to continue conducting and/or expanding their European business, some UK financial services firms may ultimately need to contemplate creating a subsidiary which becomes independently authorised in a continuing EU state or even contemplate moving their own place of authorisation from the UK into the EU. However, although how this might be done should be considered now, it may be premature to take concrete steps in this regard until the situation becomes clearer as to whether the UK is likely to secure the continuation of passporting.
