Brexit countdown – Don’t bank on a passport

25 November 2016

Philip Hammond’s autumn statement earlier this week arguably could have been renamed the “autumnal statement” since the chancellor’s underlying tone suggested the UK is entering a period of gradual decline and slowdown. Does a Brexit Winter lie ahead? And if so, how can we prepare for it?

Charles Proctor, a partner at City of London law firm Fladgate, has been analysing how Brexit could affect banking. By now, the concept of “passporting” in financial services has become increasingly familiar and the suggestion is that the UK might continue to enjoy its current status based on the principle of equivalence.

Nonetheless, the rules are complicated and, as Proctor points out, in a globalised business “the location from which a service is provided may not always be entirely clear”. But the consequence is that post-Brexit “transactions will have to be structured carefully and will thus carry additional costs”.

As a result, Proctor continues, “the loss of the EU passport will clearly place UK banks at a significant competitive disadvantage when seeking business from customers within the EU. UK banks that have provided facilities to customers in other EU member states will therefore need to plan carefully for Brexit and review their loan portfolios.”

Specific issues that will need to be addressed include an analysis of whether any of those facilities been provided on the basis of a services passport into the other member state; if so, will it become unlawful to maintain, renew or enforce that loan post-Brexit when the passport expires; and based on that analysis, and if necessary, the bank may need to consider whether the facility should be transferred to a subsidiary authorised or passported in another member state.

According to Proctor, “matters may become even more complex in considering new business opportunities”. For example, should a UK bank provide, or participate in, a five-year loan to finance the purchase of real estate in Germany? The UK will have left the EU by the time of the final repayment date, and the UK bank’s passport into Germany will therefore have expired. In the absence of a suitable banking permission, the UK bank may find that its right to enforce repayment of the loan and/or its security is challenged by the borrower.

Proctor speculates that there might be agreed transitional arrangements for deals with this type of problem. But, for the present, this must be categorised as a “known unknown”. The trouble is that there are also likely to be many unknown unknowns out there.

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Charles Proctor
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