Yesterday, the Italian Government has approved a law decree (decreto legge) containing the transitional measures that Italy would apply in a “hard-Brexit” scenario to ensure continuity of markets and institutions in the financial sector. The text of the law decree is not publicly available, but a draft version has been published last Tuesday by the Italian press.

The Italian Government has finally approved a law decree containing the Italian transitional measures for the financial sector applicable in a “hard-Brexit” scenario. The law decree will now have to be formally enacted by the President of the Italian Republic and will enter into force following its publication on the Official Gazette. The Parliament will then have to convert it into law within the following 60 days. The transitional measures will become applicable only on the date of the withdrawal of the UK from the EU, provided that an agreement has not been reached. The final text of the law decree is not yet available. However, a draft version has been published by the Italian press last Tuesday (a courtesy English translation prepared by our lawyers can be found here).

Below is a summary of the key provisions of the draft law decree. More details will follow upon the official publication.

Overview

The draft law decree confirms an 18-month transitional period starting of the date of the exit of the United Kingdom from the EU (the “withdrawal date”).

However, different regimes apply depending on the relevant financial sector entity and the passporting rights it held at the withdrawal date, as further specified below. In practice full continuity will be granted only to those entities for which a third country local regime exists (banks, investment firms and e-money institutions).

Moreover, the ability to fully rely on the transitional period will generally be subject to: (i) a prior notification by the UK firm to the competent Italian authorities, to be made no later than 3 business days before the withdrawal date, in the manner to be prescribed by these authorities; and (ii) the UK firm applying to obtain a third country local authorisation within 6 months of withdrawal date. Similar requirements will apply to Italian firms operating in the UK, in any case subject to compliance with the relevant UK rules.

UK banks and investment firms

Banks will be permitted to continue their banking business during the transitional period. However, those acting on a cross border basis will no longer be permitted to take deposits (but will be able to manage existing deposits).

Equally, during the transitional period banks and investment firms will be able to continue to provide investment services in Italy through their local branches. Those operating on a cross-border basis will only be able to face per se professional clients and eligible counterparties.

Banks and investment firms authorised to participate in Italian government bonds auctions will be permitted to continue their business (other than deposits taking) without need of a prior notification.

During the transitional period, Italian branches of UK banks and investment firms will be treated as branches of third-country firms for supervisory purposes. It is however unclear how Italian authorities will actually implement this provision, given that this may materially affect the current set-up of these firms.

Banks and investment firms will be able to apply for local authorisation under the existing rules for third-country firms (and actually need to do so within 6 months of withdrawal date if they want to continue their business after the transitional 18 months); however, no “fast-track” regimes will be available.

UK entities no longer allowed to operate in Italy

UK asset managers, investment funds, payments institutions, e-money institutions acting on a cross border basis or through agents, as well as banks and investments firms providing investment services to retail clients and elective professional clients on a cross border basis, will no longer be able to operate in Italy and will have to discontinue their business by the withdrawal date.

The decree sets however a 6-month “grace period” during which such UK entities will be able to service the outstanding contracts with a view to terminate them. The same applies to firms failing to notify the competent authority for the purposes of the transitional period and those failing to apply for a local third country firm authorisation within the prescribed terms.

Similarly, UK insurance companies will no longer be permitted to operate in Italy but will be allowed to service existing insurance policies during the transitional period, subject to the filing of a specific run-off plan within 90 days of withdrawal date.

All such UK entities must inform their clients of the initiatives taken to ensure the orderly termination of the business, within 15 days of withdrawal date.

OTC derivatives

Without prejudice to the above regime for the provision of investment services, for the performance of lifecycle events in respect of uncleared OTC derivatives outstanding at the withdrawal date, a specific regime has been envisaged:

  • banks and investment firms acting on a cross border basis will be permitted to perform lifecycle events during the transitional period also when facing Italian regions and local public entities (irrespective of their MiFID clients classification);
  • banks and investment firms that have not notified the competent authority for the purposes of the transitional period will still be able to benefit of a 6-month “grace” period from the withdrawal date, to manage such transactions (including by entering into new transactions or amending existing ones);
  • banks and investment firms that have not applied for a local authorisation will still be able to benefit of a 6-month “grace period” from the date falling 6 months after the withdrawal date, to manage such transactions (including by entering into new transactions or amending existing ones).

Tax provisions

During the transitional period, Italian tax provisions applicable to the UK as member to the European Union, including those based on EU directives, as well as tax rules implementing EU legislation on VAT and excise duties (accise) shall continue to apply, insofar as compatible. In principle, this should allow qualifying UK entities to continue to benefit from the withholding tax exemption on interest payments under medium/long-term loans granted to Italian enterprises during such transitional period. The Ministry of Economy and Finance will issue one or more decrees to implement such transitional provisions