On 23 June 2016, the United Kingdom electorate voted to leave the European Union (or 'EU'). It currently appears that the formal notice to leave the EU and trigger the two year exit process contemplated by the Treaty of Lisbon will not be given before October. This means that an actual UK exit from the EU (or 'Brexit') date is very unlikely to be before late 2018. This briefing note advises readers on the immediate considerations and anticipates how a Brexit will impact on financial services law and financial services providers more widely.
Practical steps to take now
While the precise details of the terms of a Brexit will be worked out in the coming months and years, businesses likely to be affected by a Brexit should start to identify potential areas of risk and impact and plan staff and customer communications. Those businesses will need to set aside time and resources for further analysing how they will be impacted as the picture becomes clearer.
Impact on financial services providers
Currently, a financial services provider (such as a credit institution (bank), insurance company or an investment firm) established in any EU member state or EEA member state my exercise a 'passport' to provide its services from its home state to any other EU member state or EEA member state. It is for this reason that many non-EU financial services providers have established subsidiaries in a member state of the EU so that they can access the markets of the EU and EEA.
Once Brexit occurs, unless the UK has secured the status of an EEA state or negotiated a regime equivalent to the current 'passport', financial service providers in the UK will not be entitled to exercise the passport into EU and EEA markets and financial service businesses outside the UK will only be able to access the UK markets to the extent that arrangements are made by the UK to allow access by non-UK regulated persons.
At present, it is unclear whether the UK will become an EEA state (since, to date, such status has required the acceptance of 'freedom of movement' and a financial contribution). There have also been suggestions that the EU's proposals on 'third country firms' with equivalent regimes contained in MiFID II might offer a mechanism for assuring a level of continued access by UK firms to the EU markets – however this is not equivalent to the passport and requires the establishment of branches for the provision of services to retail clients.
The ability to clear euro-denominated payments in the UK may also be affected.
The wider impact on financial services law and regulation
If the UK leaves the EU but attains the status of an EEA state, then there is likely to be very little change and the UK's legislation and regulation would evolve to ensure continued compliance with the requirements of the EU. If the UK does not have the status of an EEA state then the UK will be free to depart from the current position. That might allow for liberalisation (in areas where innovation was to be fostered or in the area of pay and bonuses for bankers) but it might well see greater some more strict regulatory requirements (such as the more onerous capital requirements sought by the UK in previous discussions within the EU).
UK financial services firms may, as the situation becomes clearer, need to contemplate creating a subsidiary which becomes independently authorised in a continuing EU state in order to continue conducting their European business so far as possible; others may contemplate moving their place of authorisation from the UK.
We intend to update our guidance in this area as the corporate implications of the Brexit vote become clearer.
This article is part of our Brexit series.