The UK edges closer to the expiry of the Brexit implementation period (31 December 2020). The diversion of resources to deal with the COVID-19 crisis; the decision not to request an extension of the implementation period; and the recent threat to renege on the Withdrawal Agreement make the prospect of a no-deal Brexit seem ever more likely.
A key concern for UK financial services firms will be the loss of passporting rights to access the EU single market. Currently, passporting enables financial firms authorised in one EU/ EEA Member State to provide services in other Member States without the need for further authorisation. Loss of passporting rights will necessitate significant changes to operations. Indeed, by September 2020, Lloyds, Barclays, and Coutts had informed both its retail and business customers in Member States that their accounts will have to be closed on or before 31 December 2020.
There are several options available to firms if passporting rights cease.
Equivalence/ Third Country Regimes (TCRs)
TCRs are available to countries outside the EU (‘third countries’), and are available where EU authorities make a determination that the legal and regulatory system of the third country is equivalent to that of the EU (‘equivalence’). However, TCRs have key limitations:
Indeed, the European Central Bank has warned that equivalence ‘does not constitute a sustainable basis’ for businesses in the long-term. Further, whilst temporary equivalence determinations will be made in respect of UK central clearing counterparties, there is no guarantee that a positive determination will be made in respect of other financial services by 1 January 2021.
Provide services pursuant to local laws of each Member State
Where TCRs are not available, UK firms will need to obtain authorisation from each Member State in which they wish to provide financial services. This may not be problematic for global institutions that already hold authorisations throughout the EU, but the cost may be prohibitive for smaller, domestic entities in the UK. There is scope for legal argument that certain services –especially those related to banking–are provided in the UK only and not in the EU where the counterparty or customer resides and, therefore, authorisation is not required. However, pursuing such a legal argument seems to be an uncertain basis on which to proceed, given that some Member States clearly take a different view of the regulatory regime..
Establish a subsidiary
Alternatively, firms could establish a subsidiary in a Member State and seek authorisation. It could then use passporting to provide services across the EU. The ECB has made clear that such subsidiaries must not be empty shelf companies. All activities relating to European products or European customers should ‘be managed and controlled from entities located in the EU.’ This means that firms must have established a credible and substantial presence in the relevant Member State – local subsidiaries cannot merely be a cover for the continuing provision of UK-based services..
Firms have been preparing for the possibility of a no-deal Brexit for some time. As will be apparent from the above discussion, smaller institutions based in the UK will be facing significant challenges in maintaining services for their EU clientele.