Impact of Brexit across policy areas—Financial Services

The House of Commons has published a briefing paper entitled “Brexit: impact across policy areas”. This article summarises the paper's findings in relation to the impact upon financial services as this is of particular significance to corporate lawyers.

Background:

A large proportion of existing financial services regulation is derived from the EU. Since the financial crisis the UK has frequently led reform of financial services in the EU. The concern of the financial community is the form or extent that existing EU legislation remains in place.

Key issues

The primary concern across all financial institutions is passporting; the future status of the UK in terms of access to the EU financial markets. To operate in EU countries, financial firms carrying out authorised activities have to be regulated. If they are headquartered and regulated in one Member State, they can operate in and sell to, other Member States without getting authorisation from each one. Therefore, London is currently an attractive place for international banks to establish a headquarters because with a UK authorisation, they can establish operations in all Member States. As authorisation of a large organisation is complex and costly, if the UK is outside the EU there is no certainty that firms would simply operate as before with a main operation in London.

A pro-market think tank, New Capital, has set out the implications that city firms will generally be considering in the aftermath of the Brexit vote:

  • The decision to delay triggering Article 50 means that the capital markets are in limbo.
  • Banks and asset management firms cannot afford to wait for the outcome of negotiations before they move their operations. They have to assume the worst case scenario and start the process of relocating legal entities operations and staff immediately.
  • Banks, asset managers and other market participants will need to relocate in order to have a separately authorized subsidiary with a sufficient management presence inside the EU.
  • Although the separation process itself may be reasonably swift, the separate negotiations to establish the terms of the future relationship between the UK and the EU will be slowed down by the competing domestic political imperatives in all 28 member states and could take years.
  • Brexit could trigger a regulatory backlash in the rest of the EU against elements of the single market and Capital Markets Union that are seen to play to the UK’s advantages, such as the location of euro denominated clearing.
  • Loss of influence of future direction and nature of EU regulation.
  • In order to retain access to the single market from outside the EU, the UK would have to retain an ‘equivalent’ regulatory framework.

A large number of initiatives are being discussed at EU level, notably the Capital Markets Union and a wide review programme of the workings of measures which have been passed but are only now being implemented. All of these will have an impact on the UK and work will continue on implementing these until such time as the UK is no longer in the EU.

The Financial Conduct Authority (FCA) has stated that the financial regulation which derives from EU legislation will remain applicable until any changes are made, which will be a matter for Government and Parliament. Therefore, firms must continue to comply with existing legislation.

Different models are available but it is not clear which of these, if any would apply. In contrast to existing models, Brexit might mean the UK will be in the position of participating in setting the new rules and negotiating a position to operate outside them.

City opinion

The majority opinion of City firms has been that the UK should remain within the EU.

Despite much comment about leaving and threats to leave, no big commercial institution has announced any significant departure.

The one definite statement of intent has come from the European Banking Authority which is the regulator for the euro-zone area. It has announced that it will move from its current London headquarters within the next two years.

Conclusion

Overall, it is difficult to predict Brexit's long term impact upon the financial services industry until Article 50 is triggered and negotiations have taken place. However, in the mean time there is a risk that financial institutions will relocate in order to ensure that their passporting rights are retained.

To read the full briefing paper please see, Brexit: impact across policy areas.

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