The U.K. is due to leave the European Union on March 29, 2019, although it is proposed there is a transitional period for 18 months – 2 years after that whereby the U.K. effectively remains within the EU for the purposes of financial institutions.
However, the EU mantra of "nothing is agreed until everything is agreed" and the fact that agreements made in phase one, including any political commitment to transitional arrangements, are not truly binding means the final deal is likely to hang in the balance for some time to come.
Firms in the financial sector have been asked by regulators to plan for a wide range of possible outcomes, including the "hard Brexit" scenario, whereby the U.K. exits the EU in March 2019 without any new trade arrangement1, withdrawal agreement or equivalence determinations in place.
This briefing discusses the key areas for consideration in the contingency plans of U.K. financial institutions with cross-border activities between the U.K. and the rest of the EU. Our experience of advising in this area is that some U.K. firms have jumped straight to a "subsidiarization model" for EU client business, without properly considering other available and legally possible optimization structures. Here, we consider the relevant steps and structuring a firm can undertake to promote a firm's and its clients' compliance with legal and regulatory obligations with minimal dependence on political outcomes, legislative changes and/or government or regulatory approvals.
UK Negotiations: the State of Play
The negotiations have so far proceeded in phases, with phase one being concluded2. It is expected that the transitional arrangements for Brexit will be formalized at a summit scheduled for 22 – 23 March. This is a pressing concern for the industry as it will give businesses, banks and investors more time to adjust to the post-Brexit environment and for the U.K. to make clear what that environment will look like. It also has the political benefit of bridging the EU's budgetary gap created by the U.K. leaving the EU. It is possible the transitional period will run for longer than 20 months though, as at the time of writing, this looks likely to be the agreed length.
The European Commission has recently published a draft withdrawal agreement for discussion with the Council and the European Parliament's Brexit Steering group3. The European Commission has also published a number of recent "Notices to Stakeholders" on the impact of Brexit for various sectors. A raft of financial services-related Notices was released on February 8, 20184. The Notices pertaining to financial services present a high level summary of the potential impact of the loss of the financial services passports. These Notices, while carefully drafted and largely correct from a technical perspective, focus wholly on a bleak "no-deal" Brexit scenario and concentrate on disclosure and planning issues. A number of questionable sweeping statements are made in these publications concerning the inability of U.K. firms to do business with EU clients after Brexit—given that reverse solicitation laws, EU and national laws concerning place of performance, national regulatory perimeters and contractual continuity provided for under human rights laws are all essentially ignored. However, these publications at least highlight the need for robust contingency planning covering all scenarios.
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Footnotes
1 The U.K. is proposing an enhanced equivalence model for a U.K.-EU deal in financial services, along the lines set out in A Template for Enhanced Equivalence: Creating a Lasting Relationship in Financial Services between the EU and the U.K., Barnabas Reynolds, available at http://www.shearman.com/~/media/Files/NewsInsights/Publications/2017/07/LNDOCS011040030v16ConsolidatedAnEquivalenceRegulationFINAL02.pdf.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
