If the Government does not reach an agreement with the EU by 31 October 2019 (and there is no extension of the article 50 negotiating period), the UK may become a third country like China, Japan, Singapore, US and Switzerland. Deal or no deal, financial services firms carrying on business between the UK and the EEA – whether through a passport or directly under EU legislation - will be affected by Brexit.
There are two types of financial services firms that will be affected in different ways:
- firms and funds based in the UK that conduct business in the EEA; and
- firms and funds based in the EEA that carry out certain types of business in the UK.
Significant Impact post Brexit
Passporting allows firms authorised in an EEA state to conduct business within other EEA states based on their ‘home’ member state authorisation. After Brexit, and any implementation period, passporting in its current form will end for the financial firms currently using it in the UK. This may change depending on any future agreement with the EU.
In the event of a hard Brexit, UK firms will lose their ability to access the single market and provide financial services to EU clients on the basis of their passporting rights and EU firms will be limited in their ability to passport into the UK market and provide financial services to UK clients.
The UK’s temporary permissions regime (TPR) will allow EU firms to continue accessing the UK market for a limited period of time without seeking full authorisation. However, the EU authorities have not put forward a similar arrangement for UK firms accessing the EU market and have stated that firms must ensure that they have they necessary authorisations in place before 31 October 2019.
MiFID Tied-Agent Regime
The MiFiD tied agent regime will be narrowed to refer only to FCA-registered tied agents
The UK operates the MiFID tied agent regime alongside the existing, and similar, appointed representative regime. An appointed representative carrying out MiFID business in the UK is also a tied agent. Under MiFID, a firm may also use tied agents when it exercises its right to passport into other EEA States. After Brexit, the FCA has stated that the UK’s regulatory regime will continue to recognise the distinct, but overlapping, concepts of appointed representatives and tied agents. However, because passporting rights will cease after Brexit, it will no longer be possible for UK firms to exercise such rights to use tied agents to provide services in other EEA States. Likewise, EEA MiFID investment firms will no longer be able to exercise such rights to use tied agents to provide services in the UK.
UCITS are domiciled and managed in the EU and currently the majority of UK UCITS assets stem from EU investors. After Brexit UK UCITS will no longer have an association with the UCITS Directive. Regulations have been published relating to the onshoring of the UCITS regime. The regulations outline the creation of a "UK UCITS" regime for funds established and authorised in the UK. The TPR will allow EU UCITS that are marketed in the UK before Brexit under the marketing passport to continue to be marketed in the UK for up to three years after Brexit. UCITS operators who wish to use the TPR will need to notify the FCA before Brexit of the UCITS which will continue to be marketed in the UK under the TPR.
Under the UCITS Directive, a UCITS can only be managed by an authorised EU UCITS manager. Therefore, when the UK leaves the EU, any UCITS managed by UK managers will lose their UCITS status (and will be treated as AIFs) and will no longer be marketable to retail investors on the basis of a passport. The re-classification of the UCITS as an AIF has the effect that those funds will only be marketable in the EU on the basis of national private placement regimes (NPPRs) or, when available, the EU marketing passport for non-EU AIFMs.
In addition, a UK UCITS manager wishing to operate under an EU passport post Brexit would need to set up an EU domiciled self-managed UCITS or a UCITS managed by an EU management company (with potential delegation of portfolio management to the UK investment manager).
Potential Significant Impact post Brexit
There is no doubt that the AIFMD regime will be affected once the UK leaves the EU. The AIFMD Brexit Regulations have been published to ensure that the regulatory framework under the AIFMD continues to operate effectively in the UK after Brexit. EEA funds (including UCITS) will be defined as AIFs, but in the event that no deal is agreed between the EU and the UK, the TPR will enable EEA AIFs and AIFMs to continue to market or manage in the UK for a period of up to two years, provided the AIFM has notified the FCA prior to Brexit.
EEA AIFs established after Brexit and marketed in the UK will be subject to the UK’s NPPR. Reliance on the NPPR requires the AIFM to notify the FCA and a cooperation agreement to be in place between the supervisory authority of the relevant EEA Member State and the FCA. However, there are no cooperation agreements in place with EEA Member States as yet.
A UK AIFM’s permission to market an EEA AIF in the EEA will disappear post Brexit. A UK AIFM wishing to market its EEA AIF to investors in the EEA will be required to either use local NPPRs or wait for the UK to be assessed and approved by ESMA and for the AIFMD passport to be extended to it.
In terms of a UK AIFM with a UK AIF, its permissions for marketing in the UK would remain intact post Brexit. However, the UK AIF would have to be marketed to EEA investors under Article 42 AIFMD by way of the local NPPR (i.e. as the UK AIFM will be a third country AIFM).
UK Payment Service Providers (PSPs) currently operating in multiple EEA member states on a cross-border basis (i.e. without a physical presence in those EEA member states) will face potentially significant implications post-Brexit. Where there is a one-off relationship between a UK PSP and an EEA customer the UK PSP will have to discontinue its relationship with the EEA customer. All UK PSPs will have to stop taking on new EEA customers from Brexit day. Where the UK PSP provides services to an EEA customer on an on-going basis, the impact is more serious and the loss of the PSP’s cross border services passport may result in the PSP becoming subject to local authorisation requirements post-Brexit.
In relation to the branch passport where a UK PSP has a branch in another EEA member state, then the UK PSP would likely need to apply for local authorisation in order to continue its business following a no-deal Brexit. UK PSPs that are currently operating in other EEA member states via branches would need to convert at least one branch into a subsidiary in order to apply for the relevant local authorisation (and subsequently may passport using that authorised subsidiary throughout the EEA).
Lower Impact post Brexit
UK-based firms doing business in the UK
UK-based firms that only do business in the UK may be affected less directly than others or not affected at all. However, it will still be important for these firms to be aware of the changes to be made to UK financial services legislation and the FCA Handbook from 31 October 2019.
UK Financial Services Legislation
The European Union (Withdrawal) Act 2018 will convert existing direct EU legislation into UK law on Brexit day, and preserve existing UK laws that implement EU obligations. The Government has also been given powers to amend this retained EU legislation so that it works effectively when the UK leaves the EU. The Government’s intention is that the same rules and laws will apply after exit as before, as far as possible, but with the necessary amendments to reflect the UK’s new position outside the EU, and to smooth the transition to this situation.
The FCA will amend and maintain EU binding technical standards and its Handbook to ensure it is consistent with changes that the Government is making to retained EU law so that it still works effectively when the UK leaves the EU.
Until the final details of the UK’s withdrawal agreement with the EU are known, there is likely to remain uncertainty on the exact impact of Brexit on the UK financial services industry. While financial services firms in the UK and the rest of the EU may hope for a withdrawal agreement that allows for the continuation of the cross border access currently enjoyed by the UK and the EU respectively, they should be making contingency plans to cover all potential scenarios.