In the event of the UK exiting the EU with a Deal and a transition period applying, the status quo will be maintained until the end of that transition period (currently envisaged to be 31 December 2020).
Withdrawal of the EU Passport for Financial Services firms (European Commission Contingency Action Plan)
In the even of a No Deal Brexit, financial operators established in the United Kingdom will lose the right to provide their services in the EU27 Member States under EU financial services passports from the 31 October 2019.
As of 7 January 2019, UK authorities accepted formal notifications from EEA firms and funds that may wish to make use of the Temporary Permission Regimes. The notification window for firms supervised by the FCA only expires on 31 October 2019.
Further, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions marketing regime for that fund. They will not be able to continue marketing that fund in the UK on the same basis as they did before exit day.
In February 2019, in the UK the Financial Services Contracts Regime (FSCR) SI was made law. This legislation establishes the Supervised Run-Off (SRO) and Contractual Run-off (CRO) mechanisms. These will serve as a back-stop to the temporary permissions regime (TPR) by allowing firms that do not enter the TPR, or leave it without the necessary permissions, to service their pre-existing contracts for a limited period after exit.
The UK regulators have also announced that they are extending the use of their transitional powers in the event of a No Deal Brexit, from June to December 2020. This transitional power regime is designed to ensure that in the event that the UK leaves the EU without an agreement, the UK regulators have the flexibility to allow firms and other regulated persons a 14 month phase in period to comply with UK “on-shored” rules.
The European Commission had adopted a 12 month equivalence decision for UK Central Counterparties to 30 March 2020 as well as a 24 month equivalence decision for UK central securities depositories to 30 March 2021, in order for EU 27 entities to fulfil their legal obligations and put a viable alternative in place. Those timelines have not yet been formally extended.
The Commission also adopted two delegated Regulations facilitating novation, for a fixed period, of certain OTC derivatives contracts with a counterparty established in the UK to replace that counterparty with a counterparty established in the Union. This allows such contracts to be transferred to a EU27 counterparty while continuing to be exempt from the clearing and margining obligations under the European Market Infrastructure Regulation (EMIR).
Other `equivalence’ decisions require a positive assessment of the third country’s regulatory framework, which enables the EU to rely on the third country’s rules and the work of its supervisor. There are currently around 40 equivalence provisions in EU financial services legislation and the Commission has to date taken over 280 equivalence decisions for more than 30 countries. There is no proposal to change the Commissions current approach in light of Brexit.
Impact Assessment on inability for UK firms to utilize the EU passport
The Central Bank of Ireland continues to emphasise that it expects firms to ensure they have robust contingency plans in place to minimise the impact on customers, investors and markets.
Firms, which haven’t performed an impact assessment which enables them to identify whether they have an EU-passport related reliance on a UK financial services firm, should do so now. Where such reliance exists, firms should continue to take all the necessary steps to mitigate the loss of that passporting ability.
Firms should, in accordance with their Brexit contingency plans, actively inform their clients about the steps they have taken and how they are implementing them.
The European Securities and Markets Authority (ESMA) recently reminded firms that will be impacted by Brexit that they should ensure that they provide clear information to clients whose contracts and services may be affected by Brexit. ESMA also noted that relevant information should be provided as soon as possible, and should cover at least the following areas: