On 23 June 2016, the UK public voted to leave the EU. The Supreme Court has decided that Parliamentary approval will be required to serve the formal notice required to leave. That approval is expected to be given but the notice period required means that the actual British exit (or 'Brexit') date cannot be before 2019 (two years after serving notice).
Negotiation of a new trade agreement with the EU could take several years beyond 2019 although the Prime Minister has declared the objective of achieving such an agreement within the two-year period.
A Government White Paper should provide a clearer idea of the shape the UK government hopes Brexit will take. Based on the Prime Minister's Lancaster House speech it is unlikely that Brexit will reflect any of the current models (Norway or Switzerland) and the aim is for a bespoke deal.
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 terms of Brexit will be worked out in the coming months and years, businesses likely to be affected by 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.
Although the Prime Minister has indicated a desire for a deal with the remaining members of the EU (the 'EU27') and there are voices on both sides of the Channel that believe that a deal on financial services is important to the UK and the EU27, there is no indication that there will be a deal with the EU27 or what form it will take. A final deal may be preceded by a transitional deal – if the EU27 agree.
There have 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.
There may, in the longer term, be new opportunities if the UK secures deals on services with countries outside the EU.
The wider impact on financial services law and regulation
Outside the EU and EEA the UK will be free to depart from the current EU-based regulatory 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 some more strict regulatory requirements (such as the more onerous bank 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 from the UK.
We intend to update our guidance in this area as the implications to the financial services sector of the Brexit vote become clearer.