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The UK left the EU on 31 January 2020 and has now entered into an implementation period that is due to end on 31 December 2020. During that time, the UK will remain subject to EU financial services legislation, and EU passporting arrangements will continue to apply in the UK. This analysis considers what Brexit means for financial services during the implementation period and beyond.
During the implementation period, which is referred to as a ‘transition period’ in the Withdrawal Agreement between the UK and the EU, the UK will negotiate its future relationship with the EU. Under the terms of the Withdrawal Agreement, the transition period can be extended once by up to one or two years, if the UK and the EU agree to an extension before 1 July 2020. For more information on the Withdrawal Agreement, see the LexisPSL Practice Note: Brexit—introduction to the Withdrawal Agreement.
During this time, the UK will continue to be treated by the EU as a Member State for many purposes. While it will not participate in the political institutions and governance structures of the EU, the UK must continue to adhere to its obligations under EU law (including EU treaties, legislation, principles and international agreements) and submit to the continuing jurisdiction of the Court of Justice of the European Union, in accordance with the Withdrawal Agreement.
This means that EU passporting arrangements will continue to apply in the UK during the implementation period, and UK firms will remain subject to EU financial services legislation. EU regulations will continue to have direct effect in the UK, as will guidelines issued by the European Supervisory Authorities (ESAs)—the European Securities and Markets Authority (ESMA), the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIOPA).
New EU legislation that takes effect before the end of the implementation period will also apply to the UK. UK firms should therefore continue to monitor the progress of EU initiatives such as the Capital Markets Union, the Banking Union and the EU Sustainable Finance Action Plan, which the new European Commission has identified as policy priorities for 2020, along with other developments such as proposed new legislation on stablecoins. For more information, see the Commission’s 2020 work programme.
The ESAs are also scheduled to carry out substantial reviews of existing EU legislation such as MiFID II, the Market Abuse Regulation and Solvency II during 2020, though any resulting changes to legislation are unlikely to enter into force before 2021.
Importantly, the UK government and regulators will no longer be able to participate in discussions at the European level, unless they are invited to do so. This means, for example, that the Financial Conduct Authority (FCA) will no longer be a member of ESMA’s Board of Supervisors, which makes all policy decisions on behalf of ESMA. UK institutions and regulators will therefore have limited scope to influence changes to the EU regulatory regime during the implementation period.
The repeal of the European Communities Act 1972, effective on exit day, is subject to specific savings provisions to allow for the operation of the implementation period in UK domestic law. Key provisions of the European Union (Withdrawal) Act 2018 (EU(W)A 2018) and associated Brexit-related legislation, including Brexit statutory instruments (SIs), are amended by the European Union (Withdrawal Agreement) Act 2020 (EU(WA)A 2020) where required to reflect the transitional arrangements. This includes deferring the adoption of retained EU law and commencement of related Brexit legislation (including Brexit SIs) from exit day until the end of the implementation period (IP completion day), which is defined in EU(WA)A 2020, s 39.
HM Treasury has made more than 50 Brexit SIs under the EU(W)A 2018 to ensure there is a functioning legal and regulatory regime for financial services from exit day in all scenarios. For more information, see the LexisPSL Brexit—Financial Services—Statutory Instruments (SI) tracker. These SIs were originally due to commence on exit day but will now come into force on IP completion day.
However, this will not apply to a number of financial services temporary permissions and transitional regimes, which have already commenced so that the FCA, the Prudential Regulation Authority (PRA) and affected firms can begin preparing for those regimes before exit day. For example, provisions allowing EEA passporting firms to notify the regulators so that they can enter the Temporary Permissions Regime (TPR) on exit day are already in force.
The Financial Services (Consequential Amendments) Regulations 2020, SI 2020/56, were laid before Parliament on 28 January 2020. The instrument delays the application of a number of financial services temporary permissions and transitional regimes established by the Brexit SIs, so that they apply by reference to the IP completion day rather than exit day. However, the pre-exit provisions will remain in effect during the implementation period, so that the regulators and firms can continue to prepare for IP completion day.
For more information on the temporary permissions and transitional regimes, see the LexisPSL Practice Note: Brexit and financial services—temporary permissions, temporary recognition regimes and the financial services contracts regime for inbound passporting EEA firms and funds.
If the UK and the EU fail to reach an agreement by IP completion day, the UK will leave the EU on a no-deal basis, unless the UK government requests an extension to the implementation period, and the EU agrees to it. However, the EU(WA)A 2020 prohibits the government from agreeing to an extension, which means that the implementation period will end on 31 December 2020, unless the law is amended.
If no trade agreement covering financial services is in place by IP completion date, from January 2021 the UK will trade with the EU as a third country on World Trade Organization (WTO) terms. Given that WTO rules barely cover trade in services, this would effectively mean a no-deal Brexit for financial services. For more information, see the LexisPSL Practice Note: Brexit ‘no deal’ WTO situation—implications for Financial Services.
If the UK is treated as a third country, the EU passporting regime would no longer apply. Given that the UK and EU regulatory regimes will be closely aligned at the end of the implementation period, it is possible that the European Commission could determine that the UK regime is equivalent for the purposes of EU financial services legislation, which could give UK firms some degree of access to EU markets, though such a determination is far from certain. See the LexisPSL Practice Note: Financial Services passporting, equivalence and the UK post-Brexit.
As a result, financial services firms will still need to have contingency plans in place to prepare for the possibility of a no-deal Brexit at the end of 2020 if the UK and the EU fail to reach a trade agreement covering financial services by that date. The risk of a no-deal Brexit will escalate if the UK and the EU have not agreed to an extension by 1 July 2020.
For the immediate future, not much has changed. UK financial services firms can continue to do business in the European Economic Area (EEA) pursuant to EU passporting regimes, and EEA firms can continue to passport into the UK.
It is not yet clear how things will change after IP completion day. For firms whose business is primarily domestic, things may not change much at all. However, there are some things that firms engaged in cross-border business can do now to start preparing for the future. In particular, firms should:
In addition, banks and payment service providers (PSPs) should take steps to ensure that they can provide the necessary customer information, including the name and address of payers, for payments between the UK and the EEA after the implementation period. This information is not required for intra-EEA payments so does not currently need to be provided for payments between the UK and EEA countries.
For more information, see the FCA’s webpage: Considerations for UK firms after the implementation period.
For more information on the impact of Brexit on financial services firms, see the LexisPSL Brexit—Financial Services—overview and Practice Note: Preparing for Brexit—practical steps and considerations for financial services firms.
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Chris is a member of the New York Bar with more than two decades of experience as a financial services and capital markets lawyer in London. Before joining LexisNexis in 2016, Chris worked as a Senior Professional Support Lawyer at Linklaters LLP, supporting the firm’s market-leading Financial Regulation Group, with a particular focus on MiFID II. Chris also worked as Legal Analyst at Bloomberg, where he drafted analytical articles on EU, UK and US financial services law and regulation for Bloomberg journals and developed practical guidance content for the award-winning Bloomberg LAW legal research platform. Prior to that, Chris was a partner in the U.S. law group at Allen & Overy, advising issuers and underwriters on a wide range of capital markets and corporate finance transactions including SEC-registered and Rule 144A debt and equity offerings and mergers and acquisitions, as well as providing general U.S. securities law advice. He also co-founded the firm’s Microfinance Working Group and advised on a variety of matters including two landmark securitisations of loans to microfinance institutions.
Chris has written extensively on legal and regulatory issues for numerous publications and lectured on financial regulation, microfinance and capital markets.
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