The role of IFCs in the post-Brexit environment
After four years of negotiations and parliamentary votes in search of an elusive Brexit deal, on 30 December 2020, UK Parliament approved the long awaited Trade and Cooperation Agreement (the TCA), just one day before the end of the Brexit transition period.
The TCA covers in detail arrangements for the trade in goods and services and movement of people across the EU-UK border after the end of the transition period. The TCA came into effect on 1 January 2021, after the UK formally left the EU’s single market and custom union. Whilst the TCA contains some limited provisions dealing with financial services, the new framework created is far less favourable than the levels of EU market access that were available when the UK was part of the EU. Notably, the TCA does not grant any passporting rights, nor does it mentions equivalence decisions or changes in the scope of equivalence.
Before Brexit, under the EU passporting system, financial services firms authorised to carry out certain activities in an EEA member state had the right to apply to passport the same activities into another EEA member state. EEA financial services firms could use this regime to provide services in the UK without direct authorisation by the Financial Conduct Authority (the FCA). Further, full-scope Alternative Investment Fund Managers (AIFMs) of alternative investment funds (AIFs) were able to market the AIFs they managed across the EEA to professional investors through the benefit of a marketing passport. With the end of the transition period, these passporting rights between the UK and the EEA have fallen away.
Further, even though dialogues between the stakeholders following Brexit resulted in the drafting of a Memorandum of Understanding (the MoU) on financial services which should provide for voluntary regulatory cooperation, the MoU has not been ratified yet and its text remain unpublished. In any event, the MoU only provides for non-legally binding cooperation and does not address the issue of single market access for UK financial services.
To this extent, it is safe to conclude that, at least temporarily, Brexit has made the UK “offshore” for the purposes of the provision of financial services and fund-marketing services to the EU and from a regulatory standpoint, the UK has no better access to the EU market than its peers in other third countries, such as The Bahamas. In other words, post Brexit, the UK has effectively become a “third country” for the purposes of EU legislation. This resulting legal environment is unlikely to change or improve anytime soon.
Whilst this uncertain framework poses great challenges to the UK financial services market, it arguably has a positive indirect effect on International Financial Centres (“IFCs”), which are now on a level playing field with the UK when approaching the EU market. Similarly, UK firms looking to set up investment funds may be more likely to look to IFCs such as the Bahamas rather than traditional “on-shore EU” jurisdictions, such as Luxembourg. The generous legal incentives put in place by the Bahamian government to attract overseas investors (most importantly the favourable tax treatment) as well as an expeditious regulatory and corporate formation processes, make The Bahamas an attractive option.
In addition, the recent passage by the Bahamas Houses of Parliament of the Digital Assets and Registered Exchanges Bill 2020 facilitates the registration of digital token exchanges as well as the regulation of digital assets-based payment services businesses. It also provides for the registration of financial services related to the creation, issuance or sale of digital tokens. It will be of great interest to see how the Bahamas develops as a digital assets hub such as Malta or the Cayman Islands as a result of this new legislation, no doubt attracting firms and investors from both the UK and EU.
And finally, the announcement in December 2020 that FAFT has removed The Bahamas from the list of jurisdictions under increased monitoring in view of the significant improvements made to its anti-money laundering and combating the financing of terrorism and proliferation regime will no double make The Bahamas an even more attractive jurisdiction to investors and fund managers alike.
The current post-Brexit legal landscape provides an excellent tangible opportunity for international financial markets, and especially for centres like the Bahamas, where tax incentives, more relaxed regulatory processes and innovative digital assets opportunities make it a very attractive option. UK and international (non EU) fund managers, digital asset providers and investors may well now look to the Bahamas as well as other IFCs as alternative offshore structuring options. We will watch the development of IFCs with great interest to see what changes this new post-Brexit world brings.