Due to the highly regulated nature of the financial services industry and the relevance to many of existing Single Market passporting provisions, Brexit is likely to pose particular challenges for financial services firms. We discuss below the initial steps that firms should consider taking in order to find sustainable long-term solutions to the potential resulting disruption.
Assessing the impact of Brexit
The UK's exit from the EU took effect on 31 January 2020 but the full impact of the UK's departure will not be felt until the end of the transitional period on 31 December 2020.
During the transitional period the UK retains access on a temporary basis to EU financial markets on the same terms as when it was a member of the EU.
It is now up to the UK and the EU to agree a more permanent future relationship. Whether the UK may be able to negotiate some kind of bespoke, privileged access to EU financial services markets is unclear although public statements of certain EU officials may cast doubt on this.
A "worst case" scenario for financial services firms would be the complete loss of any kind of privileged access to the EU financial services markets. That is to say, loss of the "passport", no bespoke deal with the EU and no ability to rely on sectoral "third country" rules - at least for some time after Brexit, if at all. A less pessimistic scenario would be that some form of access (whether by way of negotiated settlement or because of the UK's "equivalence" as a third country) will be available but this is by no means certain.
The FCA expects firms to consider how Brexit will affect them and their customers. Firms will therefore need to consider what action they will need to take to be ready for 1 January 2021 when the transitional period has ended.
We can assist with this process in order to create a bespoke impact assessment for your business.
Potential restructuring of business lines
Once a firm has modelled the likely impact of Brexit upon its business, it may be necessary to take pro-active steps to mitigate potential disruption. While this will not be appropriate for all, some firms may need to restructure their existing arrangements.
Any such assessment will vary depending on the business lines that the firm operates, the legal structure that the firm uses for the particular arrangements and the EU jurisdictions in which it is active.
This may involve establishing a new presence in one or more of the remaining EU Member States – factors to consider will include what minimum requirements (e.g. in terms of staffing and resources) need to be satisfied in order to establish a recognised physical presence in a particular jurisdiction, while maintaining UK operations, what is involved in obtaining and maintaining a local licence and whether there would be a restriction on performing particular activities or dealing with particular types of clients. Even those firms with an existing presence within the EU may need to look at reorganising their existing operations within the EU and enhancing their EU presence.
Alternatively, or additionally, firms may need to change their operational approach to the provision of certain services.
Generally, firms will want to keep changes to the bare minimum necessary to achieve their regulatory goals, and with the minimum of costs and disruption to the business and to its clients. However, business restructuring may also present an opportunity to rationalise business lines and increase overall efficiency.
We can assist with the development of restructuring plans for your business; we can also help with the process of putting those plans into practice, by liaising with EU counsel, coordinating any required regulatory processes in EU jurisdictions and advising on the regulatory profile of the business operations in the UK.
Changes to UK domestic regulation
During the transitional period, the UK will continue to be subject to EU legislation as if it remained a member state. However, it is currently unclear what the status of existing and forthcoming EU law will be in the UK once the transition period has ended.
It is expected that to a large extent, current EU legislation will remain in force in the UK, at least in the short term. However, this will ultimately depend on political considerations and there have already been indications that the UK will seek to diverge to some extent from the EU position.
Even if the status quo is maintained, there may need to be specific provision made to address certain financial services issues that cannot be solved by simply "grandfathering" existing EU law into the UK domestic legal system. For example, UK credit rating agencies and trade repositories are currently directly regulated by the European Securities and Markets Authority and therefore these functions are likely to need to be transferred to a UK regulator, such as the FCA.
In the longer term, where EU legislation is replaced by new UK domestic rules, we will continue to advise firms on the steps that they need to take to ensure full compliance with the new provisions and the resulting impact for businesses.