On 23 August the UK government published 23 separate papers providing guidance to firms and individuals in the event of a 'No deal' Brexit, which is where the UK leaves the European Union on 29 March 2019 without a trade deal or transition agreement. Each of these papers represents a different sector of the UK economy. Banking, insurance and financial services was for some, a surprise inclusion, owing to the media speculation surrounding the sector and the government's desire to release this first batch of 'No deal' papers with little controversy.
The European Union has thus far published over 80 separate papers advising firms and individuals on preparedness for a 'No deal' Brexit. The 23 released by the UK government today reflect the first tranche of preparedness documents released by the British, with more due to be published in due course.
The paper titled "Banking, insurance and other financial services if there's no Brexit deal" begins by setting out the fundamentals of the existing regulatory regime that is currently in place and which will persist until 29 March 2019. The government then explains that in the event of a 'No deal' Brexit, the UK will be subject to individual member state rules and will be treated as a third country for the purposes of EU legislation. The UK also, will default to treating other EEA states "largely as it does other third countries and their firms". However, it reiterated what has previously been stated both in the government's recent White Paper and previously by HM Treasury, which is that third country rules cannot fully provide for a Brexit transition and therefore there will be "instances where we diverge from this approach". Currently, there are no details as to when and how it would diverge.
What is the Government doing?
The government is clearly attempting to reduce the impact of a 'No deal' scenario, where possible. It has therefore undertaken certain unilateral actions in this regard. Specifically in respect of financial services, these actions include:
- A Temporary Permissions Regime: this will allow EEA firms currently passporting into the UK to continue operating in the UK for up to three years after exit. For more information on how to participate in the Temporary Permissions Regime please visit the FCA's dedicated web page.
- A Temporary Recognition Regime: this is for Non-UK central counterparties to enable them to continue providing clearing services to UK firms for a period of up to three years after exit. For more information please visit the Bank of England's dedicated web page.
- Legislation: the government will also bring forward transitional legislation for Central Securities Depositaries, Credit Rating Agencies, Trade Repositories, Data Reporting Service Providers, Systems currently under the Settlement Finality Directive and Depositaries for authorised funds.
A key implication set out in the paper relates to payment services. UK based payment services will lose their access to TARGET2 (the real time gross settlement system for the Eurozone) and also the Single Euro Payments Area (SEPA). This is likely to result in increased costs and slower processing times for Euro transactions. The government goes on to say that the cost of card payments between the UK and the EU is also likely to increase, as the UK will no longer be able to benefit from the cross-border surcharging ban.
The government has set out implications for UK customers of 'incoming' EEA firms; and vice-versa, for EEA customers of UK firms. Currently, owing to the Temporary Permissions Regime there should be no interruption of services for those UK customers of incoming EEA firms (where they have been accepted on to the Temporary Permissions Regime). However, the government has repeatedly stressed that in the absence of reciprocal EU action, EEA customers of UK firms operating in Europe may see interruptions to their services. However, as has been communicated in the past, some of these problems could be overcome by the establishment and authorisation of a subsidiary of the respective UK firm in a relevant member state.
Under the present regulatory regime, fund managers can delegate certain portfolio management services to a third party in another country, which can be outside the EU. This is dependent on a supervisory agreement existing between the authorities of the relevant member state and the authorities in the non-EU country. This delegation model should be able to continue, with the government ready to put in place co-operation arrangements with EU regulators.
Currently, EEA clearing members and trading venues will not be able to use UK central counterparties. Furthermore, EU securities would no longer have access to the UK's Central Securities Depositary and would therefore not be able to be directly settled in the UK.
UK trading venues will no longer qualify as EU trading venues, which would have the effect of prohibiting EEA firms from becoming members. UK trading venues would also cease to be eligible venues for EEA firms to execute certain equity and derivative trades.
What happens now?
Firms are encouraged to begin preparations for a 'no deal' scenario. Where there is an intention to setup new subsidiaries in the EU, firms should look to do this as soon as possible to ensure enough time for authorisation in the relevant member state.