UK financial services industry: access to EU markets after the 2019 general election

Following the Conservative Party victory in the general election held on 12 December 2019, Brexit should now be seen to be a given for February 2020. Whilst the future status of the UK’s relationship with the EU has barely featured in the dialogue between the British government and the British public, the EU27 adopted a detailed mandate for negotiations of the future relationship on 13 December 2019 at the European Council meeting held in Brussels. All we know at this stage is that the Prime Minister, Boris Johnson, campaigned in the general election on the basis that the British government should not spend any time beyond the end of December 2020 negotiating the future relationship. The consensus among trade negotiators is that comprehensive free trade agreements do not get agreed in 12 months. If the Prime Minister sticks to his position that the negotiation should last no more than a year, the work to be done on creating a comprehensive UK-EU market access arrangement for UK financial service providers to operate in the EU without setting up in the EU looks like a tall order to be executed in a short period of time.

Adopting a pragmatic approach to finding solutions for 2021

In view of the truncated timetable, UK financial service providers with EU business ambitions or existing EU customers should be considering solutions that are not dependent on any particular outcome from the future relationship talks.

This briefing looks at the timetable for completing Brexit, the possible timetables for the future relationship talks, the implications for financial services firms and the actions that those firms ought to be taking now.

Timings in the UK Parliament and the EU Parliament in December 2019 and January 2020

During the general election campaign the Conservative Party stated that, if it secured a majority, the Queen’s Speech to open the new Parliament will take place on 19 December 2019. Whilst it is unclear how Parliament will conduct its business over what is traditionally a holiday period, it is possible that the new government secures the passage of the European Union (Withdrawal Agreement) Bill (enacting the withdrawal agreement) before the New Year or in early January. There are related pieces of legislation concerning trade policy, financial services and for other sectors of the economy which need to proceed through Parliament in order to manage the switch from EU member state to EU third country status. In all likelihood, Brexit will occur at the end of January 2020, rather than any sooner. This is not least because the EU Parliament must, in common with Westminster, vote in favour of the withdrawal agreement before it can be treated as ratified by both the UK and the EU.

Timings for the future relationship talks during 2020

Once the withdrawal agreement is passed by Parliament, the clock will begin running down on the future relationship talks. The government will have until 31 December 2020 (the implementation period) to agree the UK’s future relationship with the EU. The end date of 31 December 2020 is the same date as was agreed in Theresa May’s original withdrawal agreement which, if passed in November 2018 by Parliament, would clearly have provided a much longer implementation period to agree the future relationship. It is possible for the UK to agree an extension for 12 or 24 months but any such extension must be agreed before 1 July 2020. Given the government’s stance on “getting the deal done”, it seems unlikely that an extension would be sought but at this point, it does remain a possibility, albeit a remote one.

The implementation period

The implementation period is the start of the UK’s life as a third country outside the EU in the sense that the UK will no longer have any formal influence as an EU member state on framing EU policy or legislation but will continue to be subject to existing and new EU laws. This means that the UK will maintain its market access rights until the end of the implementation period and firms can continue to use and apply for branch, services and/or marketing passports as currently applicable.

What are the options for firms after the implementation period?

Equivalence

The best chance for the UK to maintain its financial service market access rights to the EU (and vice versa) would be by virtue of an overarching equivalence agreement. This would enable the EU to recognise UK rules as equivalent to corresponding EU rules meaning that some firms (particularly MiFID firms or AIFMs) could continue to provide some services in the EU. The problem with any such equivalence agreement is that it would never equate to the current market access rights enjoyed in the single market. In particular, not all regulatory regimes as they currently stand provide for full access by way of third country equivalence and even if they did, equivalence would not provide sufficient business certainty as the EU would in all likelihood maintain discretion to withdraw an equivalence determination at any time. In addition to this, to maintain equivalence, the UK would have to continue to comply with EU legislation in relevant areas, but as a third country would have no power to influence policy making. This is unlikely to be palatable to the UK given its decision to leave the EU.

So whilst in theory, on the basis that the UK has already implemented EU financial services legislation, an equivalence decision may appear straightforward, given the politics of such a determination, firms (especially AIFMs and MiFID firms which would benefit the most from equivalence) should not expect to rely on it. In particular, the European Commission made clear that equivalence was not a right for all third countries in a statement July 2019. Therefore whilst firms should not forget about equivalence altogether expectations of any meaningful reliance on it need to be moderated for the foreseeable future.

In the immediate term, firms should consider whether they should prepare and implement their Brexit plans on the basis of a no-deal future relationship when the implementation period comes to an end and monitor developments regarding third countries which may (particularly for AIFMs and MiFID firms) benefit them further down the line when accessing EU markets.

What does no deal mean for accessing EU markets?

In the event that no deal is reached at the end of the implementation period (whether extended or not) the UK will cease to enjoy the benefits of being a member of the EU. This means that (subject to any extension) on 1 January 2021, UK firms will no longer be able to use their passports and World Trade Organisation (WTO) rules will apply. The WTO does not provide for any access rights. UK firms will therefore only be able to access markets in accordance with local law requirements in each member state.¹ Firms that wish to continue providing services in the EU following Brexit are likely to be well progressed with their Brexit structuring plans. Given the very real possibility of a no-deal Brexit at the end of the implementation period, UK firms should continue to implement contingency plans.

What does no deal mean for EEA firms accessing the UK market?

If at the end of the implementation period there is no deal, it is expected that the UK government will provide a further transitional period for EEA firms operating in the UK. We would expect this to mirror the framework which was established prior to the general election in anticipation of a no deal Brexit (the temporary regime). The temporary regime was designed to come into effect in the event of the withdrawal agreement not being passed leading to a no-deal exit without an implementation period.

The temporary regime comprised:

• a temporary permissions regime (TPR) for inbound passporting EEA firms and funds; and
• a financial services contract regime (the FSCR) for firms not in the TPR to run off existing contracts and conduct an orderly exit from the UK market.

The TPR

Under the TPR, EEA firms operating using an existing passport would be able to continue to do so on the basis of their existing scope of permission. In order to utilise the TPR, EEA firms supervised by the Financial Conduct Authority (FCA) were required to notify the FCA by 30 January 2020 using specified forms. For incoming credit institutions or insurers supervised by the Prudential Regulatory Authority (PRA), the notification window had already closed. As these deadlines were imposed prior to the general election being called and on the basis of there being no implementation period, it seems likely that if the temporary regime is re-instated and the TPR adopted after the implementation period, these deadlines will be extended.

As originally planned, the TPR was stated to be available for a maximum of three years within which time firms and investment funds using the regime would be required to obtain authorisation or recognition in the UK (if required). It may be the case that if the government reinstates the TPR at the end of the implementation period that timings are reduced to take into account the implementation period.

The FSCR

The FSCR was provided as a default for firms that did not enter the TPR but have pre-existing contracts in the UK which would need a permission to service. It was intended to provide regulatory cover for EEA firms to run off existing UK contracts and conduct an orderly exit from the UK market. It would not have enabled EEA firms to write new UK business. Additionally, the FSCR would not have provided regulatory cover for EEA firms managing UK authorised funds, or the depositaries or trustees of such funds. These firms would need to have entered the TPR to continue to operate under the temporary regime.

The FSCR was intended to apply for a maximum of 15 years for insurance contracts and five years for all other contracts. Firms relying on the FSCR were also required to keep authorisation in their home state.

The FSCR provided for two approaches:

• supervised run-off – for EEA firms with UK branches or top-up permissions in the UK, and firms who entered the TPR but did not secure a UK authorisation at the end; and
• contractual run-off – for remaining incoming services firms.

Prior to the general election, additional run-off regimes were also established for payment and e-money firms as well as central counter parties and trade repositories.

Additional/alternative FCA/PRA rules were due to apply to firms depending upon whether they were deemed authorised or exempt under the applicable run-off regime.

Whilst the regulatory parameters for EEA firms operating in the UK following the implementation period remains uncertain, a cliff edge seems unlikely. However, this does not mean that firms should not press ahead with contingency plans. At this stage, there is no guarantee that the temporary regime will be implemented and even if it is, firms operating within the UK regulatory perimeter will still need to prepare for either authorisation in the UK, or an orderly run off of their business.

How will UK business operations of UK firms be impacted?

Although UK firms might reasonably expect business as usual in respect of their UK operations, some preparations will need to be made in the event of a no-deal Brexit at the end of the implementation period. The government will continue to onshore EU legislation to replicate EU financial services law into UK law to minimise disruption. However, this process is not straight forward in all cases and firms will need to prepare to comply with amended requirements. This is most apparent for MiFID firms subject to transparency requirements where operational functions previously performed by the European Securities and Markets Authority will be performed by the FCA. This means that less than three years after MiFID II implementation, firms will need to revisit their transaction reporting procedures to ensure that they can meet the new onshored requirements. In this area, the FCA will not provide a transitional period and has made clear that it expects firms to undertake reasonable steps to comply with the changes to their regulatory obligations which will take effect from the end of the implementation period.

Actions

Firms must use the implementation period to refine and execute their contingency plans. In particular, firms should:

• continue to identify all areas of their business which will be impacted by Brexit. This analysis must take into account all arrangements: 
  • with an EU nexus (for example, delegation/outsourcing arrangements, distribution arrangements, servicing agreements, direct marketing); and
  • which are currently subject to EU law and therefore will be impacted by onshoring EU legislation;
• ensure that there is a contingency plan for each area identified as at risk in the event of a no-deal Brexit at the end of the implementation period; and
• understand the timings for Brexit, particularly the 1 July 2020 deadline. Firms will need to make (further) judgements in terms of activating or, in the event of a further delay, pausing certain stages of implementation of their contingency plans.

¹ On the basis that the transitional regime was expected to provide cover for firms for up to three years following a no deal exit, we would expect this regime to apply in the event a deal is not reached at the end of the implementation period.