Today the United Kingdom (UK) will definitively and officially leave the European Union (EU). When looking at Brexit over the course of past 40 months, the bright side may certainly be considered that the endless cliffhanger of Brexit is coming to an end. However bright nevertheless this certainty may seem, another, darker, certainty is inevitably linked thereto: negotiating a final exit treaty between the EU and the UK is not only difficult, but factually and practically impossible. As such, we are heading towards a factual “hard Brexit” that will only be softened by a few cushions on a selected handful of topics, where the EU and the UK are willing to strike a deal.
Financial services, let’s not fool ourselves, will not be part of the cushions – too important are the interests between the London financial center and the remainder of the continent. As such, it is, yet again, time to prepare for the worst – the hot topics remain the same, but the timeline has yet again changed. European banks are asked, by different national and European authorities, to ramp up their Brexit preparations and hold steady on their post-Brexit planning.
But what will this post-Brexit look like?
The unknown territory the EU and the UK are venturing into turns around questions of the current supremacy of UK law in financial services – other local laws on the continent have proven their willingness to step in as alternative and have, over the course of the last months adapted their legal frameworks to cater for the needs of financial market actors. This raises obviously the ever-important question of repapering, which does not only has a significant cost impact, but also needs to be considered from a timing perspective. Repapering significant amounts of contracts takes time and needs a complementary education by the different people involved in it.
The post-Brexit era will further be shaped by the economic development on each side. It can be safely assumed that the British pound will go through a period of devaluation which impacts cash management of banks and other market participants. The evolution of the Euro will also have to watched to ensure that the exposures, collateral management schemes and hedging provisions remain intact, efficient and workable.
Another significant challenges for the financial services still relevant in the context of Brexit is the market access for the UK to the EU and vice-versa. The UK financial market remains an important wholesale hub for the EU and accounts for up to 80 per cent of EU activity in financial market segments. With the loss of the EU passporting rights, the access to the respective markets by the relevant players is in danger. Finding a solution, whether based on equivalence or another model, will be the most crucial element in the upcoming discussions. An efficient future relationship between the EU and UK is desirable in order to keep UK as a partner for a prospective and competitive Europe. At the same time, it is important for Europe to remain in competition with the US and Asia on an equal footing. To achieve this, the right regulatory framework is key.
If there is no final decision or agreement between the EU and the UK until the end of 2020, the treatment of the UK as non-EU equivalent country will deeply affect the way business is currently done. In this regard, the following table provides an overview of third-country regimes for relevant financial market legislations against the advantages of a mutual recognition regime:
Type of EU firm / product
Passport right / mutual recognition
Third-country regime for non-EU equivalent country
|MiFID/MiFIR||Investment firms||Cross-border provision of investment services||Yes, but only for wholesale clients and counterparties|
|Establishment of branches to provide investment services||Optional for Member States|
|Right to remove membership of market infrastructure||No|
|Right to provide terminals on Member State territory||No|
|Permitted execution for shares and OTC derivatives subject to trading mandate||Yes|
|Trading venues and CCPs||Non-discriminatory access to trading venues, CCPs, benchmarks||Yes|
|Data service providers||Single authorisation for EU||No|
|CRD||Banks||Cross-border provision of banking and investment services||No for banking services. See above for investment services|
|Establishment of branches to provide banking and investment services||No for banking services. See above for investment services|
|EMIR||CCPs||Single authorisation for EU||Yes|
|Trade repositories||Single authorisation for EU||Yes|
|CCPs and trading venues||Rights of non-discrimnatory access to each other||No, but see above for MiFID/MiFIR|
|CSDR||CSDs||Cross-border provision of services and branches||Yes|
|Prospectus||Prospectuses||Prospectus approved in a Member State can be used across the EU||No|
|UCITS||UCITS funds||Distribution in other Member States||No|
|UCITS ManCos||Cross-border provision of management and advisory services (and branches)||No|
|AIFMD||AIFMs||Marketing of EU AIFs across EU||No|
|When “switched on”, marketing of non-EU AIFs across EU||Yes|
|Cross-border provision of management and advisory services (and branches)||No|
|Benchmark Regulation||Benchmark administrators||Single authorisation / registration for EU||Yes|
Other areas of interest to watch closely include the Brexit impact in regard of prudential and capital requirements for banks based on the rules and regulations arising out of the Capital Requirements Directive and Regulation under EU law. As such, it may very well be that a number of products may not be (fully) eligible for the different calculations required under the different rules.
All in all, it appear that the toughest decisions and effects of Brexit are yet ahead – or to put in the opening words of the above mentioned Monty Python song adapted in the musical Spamalot:
“This is a total bloody disaster. All my knights have fled, and we’re lost in a dark and very expensive forest. Well, it could be worse!”
– what an ode to Brexit.
By Gilles Walers, Legal Adviser, ABBL