On 20 June 2018, TheCityUK published a paper on the continuity of cross-border financial contracts post-Brexit.
The paper says that when the UK leaves the EU, UK-based providers will no longer be able to rely on passports and the right of establishment to service existing cross-border financial contracts throughout the EEA. There will also be an identical impact on EEA providers who will be unable to service existing financial contracts with UK-based parties. This will, for example, impact general insurance, long-term life insurance, pension schemes, medium and long-dated derivatives contracts, revolving credit facilities, and may also affect general customer terms of business, prime brokerage and custody arrangements. The extent of this issue is significant and will affect both UK and EEA consumers.
In order to remedy the difficulties for UK and EEA providers, TheCityUK says that a co-ordinated solution which takes into consideration key timeframes, agreed between the UK and the EU, is required. The solution must grandfather affected cross-border contracts either for a time-limited period or potentially until maturity. This could be achieved through:
- a bilateral agreement between the UK and EU, supported by regulatory co-operation;
- separate regulatory action or legislation in each jurisdiction, consistent with the approach agreed between the UK and EU;
- inclusion in the EU Withdrawal Agreement alongside appropriate regulatory backing for such a political agreement. Until such legislation has been passed, regulatory backing will be needed to provide certainty for providers and customers.
The paper also says that there are certain situations where such official grandfathering is the only available solution, even in the long term, such as:
- contracts relating to assets and liabilities that cannot be separated into UK and EU27 components, for example, pan-European directors' and officers' liability;
- claims that arise many years after a policy has expired but relate to a period that was covered, for example, insurance claims for asbestos exposure;
- instances where a small number of contracts are affected, and it is simply not commercially viable to establish a new subsidiary in a different country to service a small number of contracts.
The paper says that firms are already taking steps to mitigate the impact on customers and clients, however market participants cannot fully address this issue without regulatory support by March 2019. This is because the scale of the task and the need for third party co-operation will make it extremely challenging and operationally complex to complete in the limited time remaining before the UK leaves the EU.
The paper also says that
- it is critical that the UK and EU implement the transitional period that was agreed at a political level at the European Council meeting in March 2018. It is also important for UK and EU regulators to issue commitments about the future treatment of these contracts to act as a regulatory back stop in the event that the transitional period fails to materialise;
- any UK/EU solution should also be underpinned by ongoing supervisory co-operation between UK and EU regulators;
- the early announcement of grandfathering arrangements, either for a time-limited period or potentially until maturity, would allow for contract continuity which will deliver the best results for UK and EEA customers.