On 23 June 2016, the United Kingdom (UK) electorate voted to leave the European Union (EU) in a so-called 'Brexit' referendum. The full implications of Brexit are unknown and unknowable at this time as the referendum decision will need to be implemented over a period of time - expressed in the Treaty on European Union to be a period of up to two years from the time that notice of withdrawal is formally served. Until such implementation, there will be no automatic change in law or regulation.
However, even now this historic decision raises questions regarding financial services activity within the UK and the EU. Absent alternative arrangements, Brexit has potential consequences on a number of areas of financial services across the UK and the EU.
Against this backdrop, what are some potential consequences of Brexit on financial services in EU countries in Central and Eastern Europe (CEE) and South Eastern Europe (SEE)?
Passporting and access
Currently, UK/UK domiciled and regulated non-EU (Russian, Ukrainian and Turkish, as well as Swiss and US) banks, insurance companies and asset managers may operate across the EU through their UK bases by 'passporting' in accordance with European laws, such as the Capital Requirements Directive and the EU Markets in Financial Instruments Directive (MIFID). With the implementation of Brexit, such financial businesses may not be entitled to passport across the EU from the UK. Such financial businesses may need to show that the UK regulatory system meets equivalence tests, establish EU bases, or cease operations in certain markets.
EU financial services, particularly banking and capital markets, are highly regulated, in part due to requirements promulgated by the UK as an EU financial centre. With the implementation of Brexit, UK and EU regulations may gradually cease to be aligned. Certain UK financial services regulations may change and be incompatible with EU financial services regulations. EU entities providing services in the UK, UK entities providing services in the EU and non-EU entities proving services in both the UK and EU, may in some circumstances need to comply with dual regulations.
English governing law has long dominated financial services contracts (LMA and ISDA standards for instance), and in particular contracts concerning cross border financial services. EU law has been embedded in English law either by reference or by practice for over 40 years. With the implementation of Brexit, parties to existing English law governed contracts may need to consider how to interpret certain contractual references to EU legislation. Moreover, to the extent affected contractual provisions are material, parties may need to consider whether under their local law, the choice of law in the contracts themselves are still valid and enforceable.
Enforcement and remedies
Currently, EU courts enjoy reciprocity of enforcement and remedy whereby UK court judgments may be enforced by all EU courts on assets located anywhere in the EU and vice versa. With the implementation of Brexit, the UK and the EU may no longer recognise such reciprocity. Accordingly, parties may need to review existing contractual dispute and jurisdiction provisions to mitigate enforcement and remedy risks.