The UK left the EU on 31 January 2020 and is currently operating in a transition period where most European Union (“EU”) rules continue to apply. The deadline for both sides to agree an extension to the transition period has passed and the uncertainty around the future operation of financial services within the EU continues to persist.
The UK confirmed it will not be seeking an extension meaning that if the EU and UK do not agree a trade deal, the UK will begin trading with the EU on WTO terms from 1 January 2021.
The UK’s decision to leave the EU has significant implications for the European financial services sector. Specifically, Brexit will have consequences for those financial institutions based in the UK who rely on the European Economic Area (“EEA”) “passport” to access the single European market for financial services.
The future relationship between the UK and EU remains uncertain. If arrangements are not in place by 1 January 2021 passporting rights for financial services firms and investment funds out of, and into, the UK will end.
Currently, financial institutions authorised by a European competent authority under an EU single market directive can provide services on a cross border basis throughout the EEA on the basis of their home state licence without having to be separately licensed in the target jurisdiction where the clients are based - this is known as "passporting".
The UK does not wish to continue to be a member of the Single Market and therefore after 31 December 2020 (unless an alternative UK-EU trade deal is reached) regulated entities will lose their passporting rights to provide services either into the EU from the UK or into the UK from the EU.
UK Firms Passporting into the EU
In the absence of the UK financial institutions’ retaining their passporting rights into member states of the EU, UK financial institutions may be required to establish a base within the EU in order to continue to provide services within the EU. This will involve UK financial institutions relocating to another jurisdiction within the EU from which to passport their financial services.
Ireland is an obvious domicile for UK firms that are seeking to relocate within the EU and the benefits of an Irish authorisation for financial institutions seeking to continue to a passport into EEA countries are summarised below.
EU Firms Passporting into the UK
The implications of Brexit for EU firms passporting their services into the UK also needs to be considered. The UK Government has introduced a temporary permissions regime for EU firms, investment funds and their managers passporting their services into the UK (the “Temporary Permissions Regime”) which allows for EU firms to operate for a limited period of three years and thereby continued to provide services on a cross border basis into the UK while they seek authorisation from the relevant UK regulatory authority. Firms are required to notify the Financial Conduct Authority (“FCA”) if they wish to utilise the temporary permissions regime. Fund managers will also need to notify the FCA of the funds they wish to continue to market in the UK.
With effect from on 30 September 2020 the FCA will re-open the window to allow EU firms and fund managers to notify the FCA that they want to use the Temporary Permissions Regime. This will allow firms and fund managers that have not yet notified the FCA a further three month period expiring on 31 December 2020 that they intend to avail of the Temporary Permissions Regime.
The possible loss of EU passporting rights may not signal the end for the provision of cross-border financial services from the UK. One option to consider is the so-called “third country” provisions provided for in certain directives, such as MiFID, AIFMD and the Solvency II Directives. These provisions permit third country firms, i.e. firms that are not located in the EEA, to provide some cross-border services in the EEA without requiring the third country firm to be licenced within the EU, provided the jurisdiction of the third country has laws that are deemed to be “equivalent” to those of the EEA. However, this is not an immediate fix and the availability of these rights will be subject to an “equivalence” determination by the EU Commission which has discretion to determine whether UK laws and regulations provide regulatory protections that are equivalent to EU laws and regulations. The process for evaluating equivalence is often a lengthy one and requires careful consideration.
To date the European Commission adopted a 12 month equivalence decision for UK Central Counterparties as well as a 24 month equivalence decision for UK central securities depositories. A framework has also been adopted by the EU Commission facilitating novation, for a fixed period, of certain OTC derivatives contracts with a counterparty established in the UK to replace that UK counterparty with a counterparty established in the EU.
The end of June 2020 was targeted as the deadline for equivalency assessments between the UK and the EU, however, this deadline was not met. The failure so far to reach an equivalency assessment means that unless a trade deal is agreed, UK firms will not be able to continue to provide financial services without regulatory barriers or cost implications.
Why choose Ireland?
Ireland is an obvious choice for UK firms that are considering establishing a based in the EU for the following reasons:
A favourable corporate tax regime including:
A low corporate tax rate of 12.5% for trading profits
A reduced rate of 6.25% for R&D related qualifying income
An extensive double tax treaty network with over 70 countries including the UK, US and China, and
A favourable withholding tax regime both generally and for investment funds
A common law jurisdiction similar to the US and the UK legal systems
The only English-speaking member state in the Eurozone
Grant aid available for companies establishing in Ireland
A highly developed and pro-business jurisdiction with an established track record of foreign direct investment, and
A favourable time zone for doing business across the USA and EMEA
Ireland is an obvious choice in this regard and the benefits of an Irish authorisation for financial institutions seeking to continue to a passport into EEA countries are numerous.