Alert September 13, 2018

Brexit and Financial Services

Summary

Although there is still significant uncertainty regarding any possible withdrawal agreement from the European Union in relation to financial services, the publication of the government’s draft financial services withdrawal Regulations is a sensible time to revisit where we are.

Background

The general point is that financial services firms that are regulated in any EEA Member State are permitted to undertake those same regulated activities with customers or investors established in other any other Member State, either by the establishment of a branch (which is unusual except in the case of banks) or on a cross-border basis. There is no requirement to get authorisation in the host state. These rights are established in the relevant financial services directives and, on withdrawal, these rights will be lost. This means that, in principle, UK firms will no longer have any right to undertake business with EU-based clients, and EU-based firms will no longer have rights to deal with UK clients.

Transitional arrangements

The EU withdrawal agreement envisaged a transitional period that will operate from 29 March 2019 (exit day) to 31 December 2020. During this period, all of the relevant EU directives will remain applicable in the UK and all firms will continue to benefit from the existing passporting arrangements. A corollary of this is that all obligations derived from EU law (in particular in relation to MiFID and the AIFMD) will continue to apply in full. The transitional period, however, is part of the general withdrawal agreement and is wholly dependent upon the outcome of negotiations with the European Commission. There is still a not insignificant risk that this withdrawal agreement is not ratified and that the UK leaves the EU on 29 March 2019 without an agreement and without the benefit of the transitional period, hence the government’s draft Regulations.

Temporary permissions regime

The government and UK regulators are proposing to adopt a similar approach to the authorisation of European firms operating in the UK in the event of a no transition exit that they adopted with consumer credit firms when they first became regulated by the FCA as follows:

  • EU firms that are exercising a passport right into the UK on exit day and which have notified the regulator by that date will benefit from a temporary permission until their full authorisation has been granted. The notification process window will close before exit day, and firms that have not notified the FCA by that date will lose their ability to conduct business in the UK.

     

  • The FCA will then allocate a “landing slot” within which EU firms will need to submit their application for full UK authorisation. It is likely that the first slot will be from October 2019, and the last will be in early 2021.

     

  • EU managers that wish to continue marketing funds after exit day will need to provide notification of these funds to the FCA or the ability to market will be lost. Registration (or re-registration) in the UK is, however, a straightforward process.

Overseas persons exclusion

The government is not proposing to amend the overseas persons exclusion set out in the Regulated Activities Order 2001, so the effect of this is that an EU firm that does not have a place of business in the UK and which limits its activities to professional clients may not even need to obtain authorisation in the UK since its activities are excluded from the general prohibition. This will be of great significance for institutional business in the UK.

Situation in other EU states

There are no current proposed reciprocal arrangements from EU states to allow UK firms to continue business following exit, and most EU countries do not operate an overseas persons exclusion. This means that, unless a transition agreement has been made, UK firms will be prohibited from dealing with EU customers unless they have obtained authorisation by exit day. EU regulators have already started contacting UK firms that are exercising EU passporting rights to ask what their plans are in relation to obtaining EU authorisation or ceasing to conduct business.

UK managers will also lose the passported marketing rights in other EU countries. Registration in other states will be a cumbersome and expensive process. In some countries, such as France and Italy, is not possible.