The decision of the UK to exit the EU will have some serious consequences for the financial services sector. The exact effect will not become clear until the UK has negotiated the terms of its exit but financial service providers will need to consider now the possible impact of Brexit on their business operations and corporate structure.
Loss of Passporting Rights
Unless the UK remains a member of the EEA or negotiates a similar relationship agreement, they will become a “third party” under EU legislation and financial service providers who are based in the UK will no longer be able to rely on a “passport” to provide services across the EU. It may be necessary for these firms to establish themselves elsewhere in the EU to retain access to the EU market. Similarly, financial service providers who are based in Ireland or another EU member state may not be in a position to provide services to the UK without establishing a presence in the UK. The establishment of a presence in another jurisdiction is complex and costly and organisations should not wait until after the UK completes its negotiations to begin this process, if they wish to protect their business.
Post-Brexit, there will be two different sets of regulatory regimes in the UK and the EU and financial service providers operating in both jurisdictions may need to comply with both sets of rules. In particular, it is likely that the UK may adopt new insolvency rules which will make cross border insolvencies and restructurings more complex.
Existing banking documentation and trading arrangements will need to be thoroughly reviewed to ensure that there will be no gaps or unintended consequences post-Brexit. Some of the key issues that may need to be considered are:
- Governing Law: English law has traditionally been chosen as the governing law in the financial services sector. It is not yet known how English law will change post Brexit when the UK legal system is disconnected from the EU. If English law changes quite dramatically, there may a question mark over the enforceability of English governing law clauses. Parties to such agreements may need to consider amending existing governing law clauses and it will be an important consideration when entering into new documentation going forward.
- Jurisdiction: Where parties to a contract have agreed that the UK will be the jurisdiction of choice, it is unlikely that this will not be upheld post Brexit. However, in the absence of a specific term in an agreement, certain EU rules which have previously governed the choice of jurisdiction for parties to an agreement will no longer apply to the UK post-Brexit. When drafting transaction documents this will need to be considered and existing documentation may need to be reviewed.
- Material Adverse Change Clauses: There appears to be a general view that Brexit will not trigger a material adverse change clause, however, where access to the EU market is essential for a business, it is possible that any difficulties in accessing the EU market post-Brexit could constitute a material adverse change. In addition, fluctuations in currency prices and instability in the market could lead to difficulties in repaying sums due under loan agreements which in turn could lead to an event of default. Businesses should review their documentation and ensure there are safeguards in place to deal with such uncertainty.
Ireland as an alternative financial hub
While the financial services sector is certainly facing significant challenges and upheaval, there are potential opportunities for Ireland post Brexit. Until the UK has negotiated the terms of it’s exit, the position on passporting rights remains a huge concern for many businesses. Businesses may look to Dublin as an alternative base to ensure access to the EU market. The UK and Irish legal systems are very similar and as our system will not be subject to the same upheaval as the UK legal system, it may be that Irish choice of law clauses and jurisdictional clauses become an attractive alternative.