Does Brexit spell the end for cross-border operations for financial services firms?

Impact for single market firms

A significant proportion of institutions regulated by the UK Financial Conduct Authority enjoy 'passport' rights under one of the EU single-market financial services directives, allowing them to provide services or establish a branch on cross-border basis in other EEA member states, without having to obtain fresh licences in those 'host' states.

The decision to leave the EU now poses a major question for these firms that is whether their passport rights will be maintained and how they might provide services to clients or operate in the rest of the EU.

The current passport rights include:

  • The Markets in Financial Instruments directive ('MiFID'), in respect of investment managers,
  • The Undertakings in Collective Investments in Transferable Securities ('UCITS') Alternative Investment Fund Managers directives ('AIFMD'), for fund managers;
  • The Capital Requirements directives ('CRD') and regulation ('CRR'), for banks;
  • The Solvency directives, in respect of insurers.

Consumer credit providers are not entitled to a passport, so a lender from another EU member state who currently wants to offer loans to borrowers in the UK would need to set up a UK establishment and apply for authorisation from the FCA.

It appears that the majority of UK MPs are acutely aware of this potential risk, and are considering voting on a cross-party basis for the UK to remain a member of the European Economic Area ('EEA'), in the event that it leaves the European Union. Current members of the EEA who are not also members of the European Union are Iceland, Liechtenstein and Norway. These countries are not represented in the European Parliament, European Council or European Commission, but are bound to implement directives which have EEA-effect, and thereby enjoy the benefits of the single market and its passport.

The EEA Agreement guarantees citizens of EEA member states the following 'four freedoms':

  • The free movement of goods;
  • The free movement of services;
  • The free movement of capital; and
  • The free movement of persons.

The EEA Agreement does not cover the following EU policies:

  • Common Agriculture and Fisheries Policies (although the Agreement contains provisions on various aspects of trade in agricultural and fish products);
  • Customs Union;
  • Common Trade Policy;
  • Common Foreign and Security Policy;
  • Justice and Home Affairs; or
  • Monetary Union.

The direction of the debate that was being pursued by the leave campaign suggests that, although leaving the EU would not necessarily mean that the UK must leave the single market, it might choose to do so. In particular, the Leave Campaign's focus on controlling immigration – i.e., the ability of the UK to restrict the right of citizens from other EU countries to visit, live and work in the UK, would only be achievable by imposing restrictions on immigration from other EEA member states, meaning that the UK would need to leave the single market.

If the UK were to also leave the single market following a Brexit, then UK firms would cease to enjoy passporting rights on the same basis, since it would be a 'third-country' (i.e., not an EEA member state). Given the importance of financial services to the UK's economy, it is very likely that the UK government would seek to negotiate an equivalency passport for UK firms, akin to that already set out in AIFMD (which envisages a passporting regime for firms established in third countries, although this is not likely to become available until October 2018 at the earliest).

However, this form of passport depends on those third countries applying broadly equivalent rules and protections to those available in EEA member states. The UK might therefore be in a position where it would need to continue to implement EU directives in its legislation in order to benefit from passporting rights, without having a say in the drafting of those directives.

There are clearly significant potential risks for financial services firms following a Brexit vote, and many will be considering now how much contingency planning they should do. With many factors in play, this is far from straightforward and Withers' financial services regulatory team is available to answer any questions you may have on this issue.

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