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It is not yet certain what will happen as a result of the UK parliament's debate and votes on Saturday and the subsequent request by the UK for a further extension to the 31 October Brexit deadline. It does, though, underline that firms should re-visit and take urgent steps to mitigate remaining risks to their business.

 

Those risks could arise from an exit with no withdrawal agreement, or a withdrawal agreement but no future trade agreement approved or in sight by the end of the transitional period. Also, any future arrangement seems unlikely to allow the current breadth of cross-border financial services activity between the UK and the EU27, and the operation and future of the equivalence framework is questioned.

 

It is therefore important that firms continue to be prepared for a range of final scenarios.

A no-deal Brexit

If Brexit happens without a withdrawal agreement being ratified:

  • All passports and other key measures (such as those relating to group capital requirements and supervision) will immediately fall away.
  • Memoranda of Understanding are expected to be signed (immediately or very quickly) between the UK, European and EU27 national regulators, but equivalence decisions by the Commission are unlikely to be in place for several months or longer.
  • There are outstanding concerns about the application of the share and derivative trading obligations.
  • Existing EU rules have been written into the UK FCA and PRA rule books and will come into force. 
  • The FCA has indicated a degree of forbearance for firms on MiFID II transaction reporting and EMIR trade reporting.
  • There could be significant impacts on other critical matters, such as data sharing and tax treatments, including VAT.

 

EEA firms operating, providing services or marketing funds in the UK will be able to benefit from the UK's Temporary Permissions Regime (TPR), provided they have notified the UK regulator(s) by the end of October. Firms should also ensure that any previous application for new or extended UK permissions remains correct.

 

For those EU27 firms that do not wish to join the TPR and intend to wind down their business in the UK, the Financial Services Contract Regime (FSCR) will enable them to continue to service existing contracts for up to five years (or up to 15 years for insurance contracts), enabling them to exit from the UK market in an orderly manner. Firms that have not submitted a TPR notification, or that are unsuccessful in securing full UK authorisation through the TPR route, will automatically enter the FSCR but will have to take certain actions, including compliance with UK rules that do not currently apply to them. See here for more details - Are you prepared for a “no deal” outcome?

 

EEA firms managing UK-authorised funds will not be able to continue to manage those funds under FSCR after exit day. Also, EEA-domiciled investment funds that are currently marketed into the UK will not be able to be marketed into the UK under the FSCR. These firms and funds will need to have notified under the TPR.

 

UK firms operating, providing services or marketing funds in EU27 member states will need to determine whether any national arrangements are available and monitor any EU-level developments. Some countries have introduced similar regimes to the UK TPR and FSCR, but generally they are narrower in scope and of much shorter duration. KPMG experts can advise. Firms should consider the continuity of contracts and on which law(s) they are based.

 

For UK funds, some Member States have private placement regimes enabling professional investors in their jurisdiction to invest in non-EEA funds, but they are not generally as flexible as the UK's regime. Whether selling into the EU or only in the UK, fund documents and marketing materials need to be reviewed and revised.

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A withdrawal agreement and transitional period (to end-2020)

  • It is expected that all passports and other relevant provisions will continue to operate during the transitional period, and that therefore firms will be able to continue to do business from the UK into the EU27 and vice versa, as now.
  • However, firms should closely monitor announcements about any limitations.
  • Firms should also closely monitor developments relating to equivalence decisions – see EU confirms approach to ‘equivalence’ for further details on the European Commission’s approach.
  • Firms should be prepared for a future trade agreement that is unlikely to be as permissive as the current position.

A future trade agreement (from January 2021 or later)

  • It seems unlikely that a future EU-UK trade agreement will cover financial services provided cross border to retail clients. Therefore, for example, the UCITS management and product passports are likely to fall away, and new wealth management or retail broking contracts will be more difficult or impossible. Firms will need to consider what actions to take in relation to existing retail client business, including communications with those clients or their intermediaries.
  • It is possible, though, that certain Member States will allow specific activities to continue into their own jurisdictions, under strict provisions.
  • In relation to professional clients, equivalence-like provisions might be included, but as noted above, firms should monitor the EU’s evolving approach to equivalence for third countries.
  • Business between eligible counterparties and via capital market infrastructure is more likely to be included, but it is not certain that it will be “business as now”. 
  • Group capital requirements and the designation of the lead regulator are likely to change.
  • There could also be significant impacts on other critical matters, such as data sharing and tax treatments, including VAT.