Consequences of Brexit for Banks
The consequences of Brexit for Banks based in Luxembourg depends on the outcome of Parliamentary discussion in the United Kingdom (UK) and on the final vote in the UK Parliament, i.e. if the deal negotiated between the UK and the European Union (EU) will finally be accepted or not.
In case of a disorderly Brexit, with significant barriers to trade and movement of people between the EU and the UK, European rules that regulate many activities of Luxembourg banks in the UK no longer apply. Luxembourg banks lose their ‘passport rights’ into the UK (as the passport rights are only applicable in the different EU Member States) and must separately request permission from the UK regulator to remain active in the United Kingdom.
All EU banks with a presence in the UK were requested to present, in the run-up to Brexit, their plans and preparations to the different relevant regulatory authorities (in particular, the European Central Bank (ECB), the European Securities Markets Authority (ESMA), the European Banking Authority (EBA), the Luxembourg Commission de Surveillance du Secteur Financier (CSSF), and UK authorities). In addition, a temporary license regime (Temporary Permissions Regime or TPR) has been set up in the UK for a transitional period during which banks with mainly wholesale banking activities as branches can remain active in the UK. However, banks with retail activities to consumers have had to apply for a full license.
Particular risk considerations in a no-deal Brexit are relevant for banks active in derivatives trading. In the context of clearing of derivatives trades that are used for hedging purposes, the relevant banks lose access to central counterparties (CCPs) located in the UK. Indeed, the London market plays a preeminent role in central clearing activities, whereby a CCP places itself between the buyer and the seller to cover the counterparty risk. While part of the Brexit-related disruption risk has been overcome by a number of temporary and conditional equivalence decisions issued by the European Commission (EC) and ESMA, there are remaining issues that banks need to take into consideration in their derivatives trading activities, especially in regard of the so-called “life-cycle events” in derivatives trades.
A disorderly Brexit may also create obstacles to the free exchange of personal data with parties in the UK. Most financial institutions estimate this risk as limited. Where necessary, they make use of the options available in European privacy legislation (AVG) to enable free exchange of personal data with parties outside the EU.
After a thorough examination of the risks linked to a “no-deal” scenario in the financial sector, the EC concluded that only a limited number of contingency measures are necessary to safeguard financial stability in the EU27.
The EC has therefore adopted in December 2018 the following acts:
– A temporary and conditional equivalence decision for a fixed, limited period of 12 months to ensure that there will be no immediate disruption in the central clearing of derivatives.
– A temporary and conditional equivalence decision for a fixed, limited period of 24 months to ensure that there will be no disruption in central depositaries services for EU operators currently using UK operators.
– Two Commission Delegated Regulations facilitating novation, for a fixed period of 12 months, of certain over-the-counter derivatives contracts, where a contract is transferred and/or novated from an UK to an EU27 counterparty.
Frequently Asked Questions
- What is changing for Luxembourg banks after a ‘no-deal’ Brexit?
- What does a ‘no-deal’ Brexit mean for employees of Luxembourg banks in London?
- What does a ‘no-deal’ Brexit mean for the services provided by UK banks in Luxembourg?
- How do Luxembourg banks with a presence in the UK prepare themselves?
- Information issued by the Commission de Surveillance du Secteur Financier (CSSF)
- Information issued by the Luxembourgish Government
- Law relating to the measures for the financial sector (available in FR only)
- Information issued by the European Banking Authority (EBA)
- Information issued by the European Securities and Markets Authority (ESMA)
- Information issued by the United Kingdom Financial Conduct Authority (UKFCA)
Gilles WALERS, Legal Adviser – firstname.lastname@example.org – Tel. +352 46 36 60-1