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Keeping the present for a little longer: the impact of the Brexit Withdrawal Agreement on financial institutions

Keeping the present for a little longer: the impact of the Brexit Withdrawal Agreement on financial institutions

  • United Kingdom
  • Brexit
  • Capital market law
  • Financial services and markets regulation
  • Fraud and financial crime
  • Investment funds and asset management
  • Payment systems and digital commerce
  • Financial institutions

21-03-2018

On 19 March 2018, a draft Agreement on the withdrawal of the UK from the EU was published.

The Agreement’s objective is to set out the arrangements for the withdrawal of the UK from the EU.

Amongst these arrangements are the transitional provisions which leave EU law applicable in the UK until 31 December 2020, 21 months after the exit date of 29 March 2019. The provisions will have the effect that, until the end of the transition period:

  • firms in the UK will have to comply with the UK rules which give effect to EU law and directly applicable EU law
  • the powers of EU authorities will continue to have effect in the UK
  • UK and EEA firms will continue to enjoy passporting rights
  • the UK authorities will have to implement new EU laws in the UK

The Agreement can be found here.

It should be noted that the transition period only comes into effect if there is agreement on all the terms of the withdrawal agreement. The deadline for achieving this is currently October 2018.

The Transition Provisions

The Agreement sets out in Part Four the arrangements for a “transition”. The following provisions in Part Four are likely to have the most practical impact:

  • Article 121, which states: “There shall be a transition or implementation period, which shall start on the date of entry into force of this Agreement and end on 31 December 2020” (the “End Date”).
  • Article 122(2) which affirms that: “Unless otherwise provided in the Agreement, EU law shall be applicable to and in the UK during the transition period.”
  • Article 122(3) which deals with the effects of the application of EU law and states: “During the transition period, EU law applicable pursuant to Article 122(1) shall produce in respect of and in the UK the same legal effects as those which it produces within the EU and its Member States and shall be interpreted and applied in accordance with the same methods and general principles as those applicable within the EU.”
  • Article 126 which deals with the ongoing jurisdiction of the EU authorities, such as the European Securities and Markets Authority (“ESMA”) and the European Banking Authority (“EBA”). It states: “During the transition period, the institutions, bodies, offices and agencies of the [EU] shall have the powers conferred upon them by [EU] law in relation to the [UK] and natural and legal persons residing or established in the UK.”

Article 168 states that the Agreement shall enter into force on 30 March 2019.

The Impact of the Agreement

The practical effect of the Agreement on financial institutions in the UK can be summarised as follows:

 

Issue Right/duty Impact
Current EU laws Both Remain in force in the UK until the End Date – UK law giving effect to/ recognising EU Directives such as MiFID, the AIFMD, the UCITS , until the End Date. EU Regulations such as, MiFIR, the CRR, MAR, EMIR and Level 2 Regulations continue to apply until the End Date.
Powers of EU authorities Duty Continue to have effect in the UK until the End Date – the powers of the EU Commission, ECB and the European Supervisory Authorities (EBA, ESMA and the European Insurance and Occupational Pensions Authority (“EIOPA”)) to take action against the FCA or PRA for non-compliance with EU law continues until the End Date. Level 3 Measures, suich as ESMA Q&A, continue to have binding effect until the End Date.
Passporting Right Continues until the End Date – rights of EEA authorised /UK authorised firms to provide cross-border services into, establish branches in or market products in the UK/other EEA Member States continue until the End Date. Rights which flow from passporting, such as use by inward passporting EEA credit institutions Bank of England Liquidity Facility, continues until End Date.
Forthcoming EU laws Both Must be implemented until the End Date – UK is obliged to implement EU Directives and enforce EU regulations, including those which give EEA firms rights in and into the UK, until the End Date.
 

Points for EEA Firms currently Passporting into the UK

The Agreement does not provide any further clarity on the practical impact on institutions which have to become PRA or FCA authorised and the timing of such applications.

The following comments of the UK Chancellor in the Treasury Statement issued on 20 December 2018 should be noted:

“As requested by the Bank and the FCA, the government will, if necessary, bring forward legislation:

  • which will enable EEA firms and funds operating in the UK to obtain a ‘temporary permission’ to continue their activities in the UK for a limited period after withdrawal; and
  • alongside the temporary permissions regime, the government will legislate, if necessary, to ensure that contractual obligations, such as insurance contracts, which are not covered by the regime, can continue to be met”

The transition period which provides an additional 21 months to become authorised suggests that the expectation is that any currently inward passporting institution would have to be authorised by the End Date. The possibility of a “temporary permission” regime, however, suggests that there could be some flexibility regarding authorisation by the End Date.

We would, nevertheless, expect the submission of applications within the period, at least, prescribed under the Financial Services and Markets Act 2000 ahead of the End Date. The FCA and PRA have already communicated this expectation to some of our clients in the context of the Exit Date.

Points for UK Firms currently passporting into the EEA

The Agreement does not provide any further clarity on the practical impact on UK institutions which have to become authorised in another EEA Member State and the timing of such application.

As above, the transition period which provides an additional 21 months to become authorised suggests that the expectation is that any currently inward passporting institution would have to be authorised by the End Date. Introduction of a “temporary permission” regime or some other form of special treatment seems unlikely in light of ESMA’s opinion in June 2017 on supervisory convergence and the first principle “No automatic recognition of existing authorisations” set out in that opinion.

See our briefing here.

The EBA’s opinion on Brexit relocation issued on 12 October 2017 is similar for banks with its first principle that “existing authorisation standards should not be lowered”. See here.

The EIOPA opinion supervisory convergence in light of Brexit issued on 11 July 2017 echoed this approach for insurers. See here.

How Eversheds-Sutherland can help

Since June 2016, our lawyers and consultants have advised various institutions passporting into the UK from EU27 Member States and passporting from the UK into the EU27 on Brexit planning and Brexit related issues.

We would be happy to discuss how we can help you with your Brexit planning and execution of those plans.

 

For more information contact

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