The Impact of Brexit on the Financial Services Sector
The UK decision to leave the EU has the potential to have 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.
Currently, financial institutions authorised by a European competent authority under an EU single market directive can provide services across the EEA on the basis of their home state licence without having to be separately licensed in the target jurisdictions. This is known as "passporting".
UK Firms Passporting Out
One dilemma now facing UK financial institutions is that post-Brexit they may no longer be able to passport their services across the EEA. Or at best, they will only be able to do so within a new framework which may be the result of the terms under which the UK’s exit from the EU is agreed.
The possible loss of passporting rights may not be the end 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 Solvency II Directives. Thee provisions contemplate permitting third country financial institutions, i.e. institutions that are not located in the EEA, to provide some cross-border services in the EEA without local licences if the third country jurisdiction has laws that are “equivalent” to those of the EEA.
However, the availability of these rights will be subject to “equivalence” determination, where the EU will determine whether UK law and regulation provides regulatory protections which are equivalent to those in the EEA.
Given that the current UK regulatory regimes are based on EU law, it would be difficult to see how the EU would determine that equivalence would not apply.
However, there is a risk that the EU may choose not to do so or that it may be delayed in its determination, as the process for evaluating equivalence is often a lengthy one. In addition, not all EU legislation includes the concept of equivalence and, where it does, equivalence does not provide the same freedoms afforded to EEA Member States.
EU Firms Passporting into the UK
The Brexit implications for financial institutions passporting their services into the UK also need to be considered. First impressions would suggest that access to the UK for those institutions will be restricted. There is no doubt that the framework will change, however, we cannot foresee a situation where Brexit would result in the UK market being closed off to such institutions or would be so restricted as to impede efficient commercial activity. We would predict that a distribution framework will be introduced which will result in minimal disruption to the access that such institutions currently enjoy to the UK market.
The ultimate impact of Brexit on the UK’s regulatory framework will depend on the relationship that the UK and the EU agree on in the future.
For illustrative purposes, the EU and the UK may decide to apply some of the options set out below in determining their future relationship:
- The EU and the UK could opt for the so-called “Norwegian option”, which would mean the UK becoming a member of the EEA and gaining access to the single market without being a full member of the EU. If the UK did become a member of the EEA, the passporting rights of financial institutions would be preserved.
- The EU and the UK could also opt for the so-called “Swiss option”. Switzerland is not a member of the EU or the EEA. Instead, it has negotiated a series of bilateral treaties governing its relations with the EU. The Swiss model is structured with some 120 bilateral agreements with member states and limited access to the single market. The Swiss model would not provide the guarantee of single market access that EU or EEA membership would provide. Therefore, UK financial institutions may lose their current passporting rights.
- The UK could opt to leave the EU without seeking to retain membership of the EEA or negotiating bilateral agreements. This would mean that UK financial institutions would lose their current passporting rights.
Unless the UK’s future relationship with the EU involves membership of the EEA, UK financial institutions’ passporting rights to other EEA member states will likely be restricted to some degree. If this happens then financial institutions based in the UK may be required to seek an alternative EEA base for their operations if they wish to continue to provide cross-border services.
One option for such institutions would be to apply for a full licence in each of their target EU jurisdictions. But applying and maintaining such licences and operations on the ground is time consuming and expensive.
We may, consequently, see some financial institutions opting for an alternative, which would be to move their headquarters from the UK to another jurisdiction within the EU from which to passport their financial services. Ireland is an obvious choice in this regard, as the only remaining English-speaking member state in the EU and we are actively working with a number of clients in relation to a possible move.
If you have any questions on the impact of Brexit on the Financial Services sector, please contact one of our team below or our Managing Partner, Declan Black.