On 23 August 2018, the UK government published a Brexit guidance notice entitled “UK government’s preparations for a ‘no deal’ scenario”. The notice has not been well received throughout the remainder of the EU and will have implications particularly for all UK businesses particularly those in the financial services sector.
Although, as negotiations continue to progress well, the government’s notice states that it is unlikely there will be ‘no deal’ with the EU on the issue of Brexit many commentators believe that the situation is still really 50/50.
It is expected that there will be a transitional period in place from March 2019 until 31 December 2020, and that we will see the final terms of the UK/EU ‘divorce’ mid-October this year. However, given the likely chaos if no deal is reached, it is the government’s duty to “prepare for all eventualities”, to allow individuals and firms to adequately prepare. It is clearly a good idea to speak to an expert for business legal advice to make sure that you have the correct procedures in place to avoid any negative consequences of Brexit. LawBite provides a free 15-minute consultation for all business legal enquiries made on the website where you can ask questions specific to your organisation.
The impact on financial services firms and the knock-on effect
The government’s notice makes clear that the EU financial services regulatory framework will no longer extend to the UK following a ‘hard Brexit’. This means that financial services firms, asset managers and funds will have to apply to national regulators as ‘third country firms’ (i.e. firms located in countries outside of the EU, similar to the current position with the US). Currently, third country firms generally have to apply to each EU country for authorisation to conduct financial services business in that country, rather than relying on the passporting regime that EU firms can benefit from.
The knock-on and trickle-down effects of this on other industries within the UK could be potentially huge and contingency planning has never been more important for business owners than it is now. As part of LawBite’s commitment to providing our client network with expert free resources – we provide a Free Legal Heath Check that highlights areas of potential risk to your business and for which a report is generated that is used in your free consultation with an expert LawBrief. You can read about the benefits of doing the Health Check from a lawyer’s perspective in LawBrief Alla Fairbrother’s recent blog post.
Delegation outside the EU
For investment firms in the EU that delegate portfolio management to firms that are outside the EU, there needs to be approval from both regulators involved. To get that approval, there must be a cooperation agreement between those regulators. The government notice states that UK regulators are ready and willing to agree cooperation agreements with EU regulators as soon as possible.
The EU could always step in and prevent this from happening. But the UK government has advised firms to assume that these cooperation agreements will be in place when Brexit happens.
The situation in the UK
The UK government has confirmed that it will treat European Economic Area (EEA) firms as third country firms. It will make allowances to ensure that the legislative regime continues to function so as to avoid disruption and ensure consumers are protected.
The UK government plans to allow EEA firms that currently use the EU passporting regime to operate within the UK to continue to operate in the UK for up to three years following Brexit. During that three-year period, EEA firms would have to apply for authorisation from the UK regulators.
Firms have been advised that they need to communicate to their customers, at an appropriate time, if any action is needed on their part because of Brexit planning. Although businesses should be briefed about what is required, it is prudent for business owners to keep up to date on developments to be prepared as possible.
The UK government has placed obligations squarely on the EU, stating that “unless the EU acts to maintain continuity, then UK financial services firms passporting into the EEA will lose the ability to do that at the point of exit”. This message has not been well received by some EU member states, with the view being that the UK has made their bed, and now should lie in it.
Despite the UK government issuing this guidance, the message continues to be that firms should plan for an implementation period between March 2019 and December 2020 and continue to follow guidance from regulators.
But, with overseas investors (including EU clients) having £78.5bn in UK-based funds (according to the Investment Association), this is an issue that must be rectified sooner rather than later. Hopefully October will bring better news.
For further legal advice, you can contact the author of this article LawBrief, Barbara Jamieson. For expert business legal advice, please enter an enquiry or call us today on 020 7148 1066 to speak to a member of our friendly Client Care Team.