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
In her Lancaster House speech in January 2017, the UK Prime Minister made it clear that the UK will not seek membership of the EU Single Market following Brexit. The 'Norway model', and any suggestion of an EEA passport, would appear to be dead (at least as a long term option, although see Brexit: Transitional Arrangements). Whether the UK may be able to negotiate some kind of bespoke, privileged access to EU financial services markets following its departure from the EU is unclear although public statements of certain EU officials may cast doubt on this. It is also unclear whether there may be, at least, a transitional period during which the UK may retain access on a temporary basis to EU financial markets on the same (or substantially the same) terms as now in order to "soften the blow".
In light of the above, firms should now be carrying out impact assessments to determine the possible disruption to their business lines which Brexit could cause.
For these purposes, a baseline, "worst case" scenario might assume 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). Less pessimistic variations, under which some form of access (whether by way of negotiated settlement or because of the UK's "equivalence" as a third country) will be available, can then be modelled on that baseline case. These variations may then be updated as the Brexit negotiations continue and the potential shape of the post-Brexit financial services landscape becomes clearer. 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. In particular, the concept of "equivalence" differs in important respects between different EU financial services directives and regulations.
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, rather than wait to see what comes out of negotiations. While this will not be appropriate for all, some firms may need to restructure their existing arrangements. 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.
The extent to which a degree of restructuring is required will depend upon a number of variables, including:
- the type of financial services activities undertaken by the firm;
- the jurisdictions in which the firm is active; and
- the existing legal structure of the business.
Where restructuring is necessary, firms will need to consider the impact of applicable regulatory rules on any arrangements that they intend to put in place between their UK presence and any entities in the EU.
Generally, firms will want to keep changes to the bare minimum necessary to achieve the 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
The UK government has indicated that as part of the Brexit process, it intends to enact a "Great Repeal Bill" by which it expects to preserve the effect of EU legislation in UK domestic law, pending future review.
In certain cases, it is possible that there may need to be specific provision made in the Great Repeal Bill 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, but it is unlikely that such a situation will continue after Brexit and therefore the Bill may need to make express provision for transferring these functions to an existing UK regulator, such as the FCA.
As further details of the Great Repeal Bill become available, we will explain its practical implications for financial services firms by reference to their business models.
In the longer term, where EU regulation 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.