Brexit has significantly changed the regulatory landscape for financial services firms and, consequently, the way many firms will operate going forward.
Access to the EU financial services market
The most significant impact of Brexit for UK financial services firms is the loss of "passporting". At its most fundamental level, passporting allowed UK authorised firms to establish branches for the provision of certain services within the EEA and to provide certain services on a cross-border basis to persons based in the EEA without seeking separate, additional authorisation in the relevant EEA member states. The passporting regime also provided a similar basis for EEA firms to access the UK.
Following Brexit, this is no longer available and future access for UK firms will depend either on the terms of any agreement between the UK and the EU on financial services or on the EU granting "equivalence" i.e. recognising some or parts of the UK's regulatory regimes as "equivalent" and permitting UK firms to access the EU financial services market in the areas deemed equivalent.
Although the UK and the EU finally agreed a post-Brexit Trade and Cooperation Agreement at the end of 2020, this gives only very high-level consideration to financial services.
The UK and the EU have also provisionally agreed a Memorandum of Understanding which creates the framework for voluntary regulatory cooperation in financial services between the UK and the EU and will establish the Joint UK-EU Financial Regulatory Forum to facilitate dialogue on financial services issues. However, it does not appear that this will extend to the framework for granting equivalence.
That said, there are a few general EU measures to smooth the transition for UK firms operating in the EU. For example, the European Securities and Market Authority has agreed to temporarily recognise the three UK central counterparties and Euroclear UK & Ireland Limited, the UK central securities depositary, for a limited time.
In addition, certain EEA member states have their own temporary transitional, or non-EU or "third country", regimes allowing UK firms to conduct some business either on a temporary or ongoing basis. However, some of these are limited, both in time and in scope, or involve burdensome registrations or other downsides and are therefore unlikely to provide a permanent solution for UK firms wishing to operate in the EEA.
For the moment, therefore, most firms will need to proceed on the basis that they have no special rights of access to the EEA for financial services but with the possibility that a more favourable regime may emerge over time.
Changes to UK Regulation
Brexit has, of course, led to changes to UK domestic law. In the short term, to a large extent, current EU financial services legislation will remain in force in the UK subject to some specific provisions made to address certain issues that cannot be solved by simply "grandfathering" existing EU law into the UK domestic legal system.
Whether this will remain the case in the longer term 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.
In order to smooth the post-Brexit transition for EEA firms previously operating in the UK under passporting, certain temporary transitional regimes have been put in place. These include the Temporary Permissions Regime which allows EEA passported firms to continue to operate in the UK (subject to certain requirements) for a limited period and the Financial Services Contracts Regime which allows EEA passported firms entities not making use of the Temporary Permissions Regime to run off existing contracts and conduct an orderly exit from the UK market for up to five years. There are also additional temporary regimes for the marketing of alternative investment funds and for UCITS.
The Financial Conduct Authority, Prudential Regulation Authority and Bank of England also have temporary transitional powers to delay or phase in statutory or regulatory requirements where they change as a result of Brexit, or where they apply to firms for the first time, allowing firms to continue to comply with the pre- Brexit version of the requirements for a limited period.
The UK has also made equivalence determinations in relation to EEA central securities depositories, EEA central counterparties, EEA benchmark administrators and certain EEA credit rating agencies.
Further details of these measures can be found in our 2021 New Year briefing.
How can we help?
Many financial services firms will already have taken some action to address the impact of Brexit. However, for UK (and EEA) financial services firms, Brexit, and the resulting changes to law and regulation, is an ongoing process.
We are closely monitoring Brexit developments and can advise firms on the steps that they need to take to ensure full compliance with the new UK domestic rules and the resulting impact for businesses. This includes any future arrangements between the UK and the EU.
In addition, we can assist with the development of restructuring or reorganisation plans for your business; we can also help with the process of putting those plans into practice, by liaising with EEA counsel, coordinating any required regulatory processes in EEA jurisdictions and advising on the regulatory profile of business operations in the UK.