The Brexit impact on the Financial Services 16/13

21st July 2016

                The Brexit impact on the Financial Services 16/12


The UK’s decision to leave the European Union will profoundly reshape the financial services sector both in the UK and in Europe. Following the appointment of the new prime minister and the formation of a new government, the financial service industry is waiting to see what kind of new relationship will emerge between the UK and EU, and what this will mean for firms on both sides of the channel.

The financial landscape is in flux – so what happens next, and what should financial services firms be considering when choosing how best to respond to it?

What happens pre-Brexit?

For the time-being at least, it’s business as usual. Until Britain has formally left the EU, it is remains subject to EU law. This means:

  • UK financial services law and regulations remain the same
  • EU regulations continue to apply
  • EU passporting rights still stand, and regimes will operate as normal
  • New EU measures tabled prior to the vote will come into force as scheduled (such as MiFID II)

However there is considerable uncertainty over the future of the regulatory structure governing how UK firms will access the single market, and conversely how EU firms will access the UK market. This will continue until the UK sets out its vision for a post-Brexit Britain and engages in negotiations to realize that vision – and there is no guarantee the UK will get what it wants.

What happens post-Brexit?

Put simply, the UK will have to make a choice: Either to:

  • Align the UK regulatory environment with EU measures; or
  • Diverge from EU measures and pursue a different regulatory approach, perhaps more flexible or international in focus.

Of course, the more the UK diverges from EU measures the less equivalent it will be – a key consideration for allowing UK firms access to the single market and certain third country regimes. Maintaining existing requirements as derived from EU legislation will also involve much less disruption for UK firms who have structured their operations to be compliant with such measures. It is also relevant to the capital implications for EU firms with exposures to non-EU markets.

We can therefore expect the UK to aim to maintain equivalence as much as possible. This could involve the UK government passing a law to incorporate current EU measures into UK law and to make such amendments as are necessary to reflect the UK’s new relationship with the EU.

There could be some flexibility for the UK to relax requirements for UK regulations which are not necessary to maintain equivalence with the EU, but great care must be taken in how this is applied. For example it is possible that the FCA’s sandbox might become more flexible if the UK is not constrained by EU legislation.

How will EU firms access the UK post-Brexit?

Without a formal regime to govern the cross-border access between the UK and the EU, the UK could take one of a number of different approaches. They might:

  • Invoke the regulated activities order
  • Apply reciprocal access requirements.

The regulated activities order defines what activities a person can perform in the UK. This typically requires a firm to be authorized by the UK regulator (if its services are regarded as being in the UK) unless an exemption applies. If this approach is taken, UK firms will need to carefully assess their activities, and see whether they fall within exemptions such as those applying to overseas persons. They could take the view that EU firms should be encouraged to continue to access the UK market, and decide that passporting should remain in effect. Such an open door policy would be bold, and UK firms may object to differential treatment for overseas competitors. However it may help them minimizing the impact on the UK customers, even if applied only on a transitional basis.

Another option is to apply reciprocal access requirements to those that other member states apply to UK firms seeking access to their markets. This is arguably the least attractive option as it would create different obligations and regulations for each member state.

How will UK firms access the EU markets?

This will be entirely dependent on what we agree between the EU and the UK during exit negotiations. There are a number of options that may be pursued. These are:

  • Remaining a member of the EEA (Norway model). This would preserve passporting rights, but give the UK no say over the EU measures the country is subject to. Significantly, it would also mean subscribing to the free movement of people. Given the promises made by the Leave campaign in regard to immigration and sovereignty, this may not have political support.
  • Entering into co-operation agreements (Swiss model). This would allow the UK to have negotiations regarding passporting rights with the condition that free movement of people will in not be permitted.
  • Negotiating a comprehensive free trade agreement. This would take years to negotiate and implement, and may see passporting rights revoked.
  • Falling back on the World Trade Organisation rules. This would be highly unsuitable for financial services, and comes without a passporting regime.

Until the UK makes a decision for which option it will pursue, it is clear the future of passporting is in doubt. For firms seeking to preserve access to the EU in the event that passporting regimes are revoked, another possibility is to pursue a third country regime.

What are Third Country Regimes?

Under third country regimes, non-EU firms from certain third countries can provide services into the EU. However, it is not a passport as we know it – coverage is patchy, regimes differ between each jurisdiction, and not all regulations have such a regime available. It is typically just a facility to allow firms to provide services into the EU from outside but not to passport from within a branch or establishment based in the EU itself.

Regimes are also typically dependent on assessments being made of the equivalence between the EU and third country regimes. However, unlike other models, they are not dependent on there being free movement of people between the EU and the third country regime.

Third country regimes are suited to wholesale business provided on a services basis across borders. Under MiFID II there will be a third country regime in neighbouring third country firms to provide investment services to eligible counterparties and what’s known as personal professional clients – knowledgeable institutions experienced in financial services and other institutions.

But for other types of business the treatment under EU regulations is less helpful. Services provided into the EU by third countries will need to be compliant with the law of the relevant jurisdictions; branches will require authorization by the host state; and (with some limited exceptions under MiFID II) there is no right to passport from a branch within the EU itself. There will also be significant lead time to establishing equivalence. While the European securities and markets authority undertakes a review of the differences between the UK and EU regimes there will be a period whereby the third country regimes will not apply.

While third country regimes could help some entities, they do not offer a comprehensive solution for the wider financial services sector.

What are the options if there is no passport or third country access?

Without passporting or third country access, UK firms seeking to preserve access the EU market will need to consider restructuring their operations and their legal entities.

UK-regulated firms providing services in other jurisdictions on a cross border basis using a services passport may need to establish a new regulated entity in an EU jurisdiction. The EU entity would then act as a hub for passporting into other EU jurisdictions where it has customers. This would likely involve a transfer of assets from the UK entity to the new EU entity, retaining what it needs to in order to continue to service its own UK market. Firms may consider establishing outsourcing arrangements between the UK and EU entities for resources retained by the EU.

For UK regulated-firms with a permanent branch in an EU jurisdiction, one option would be to convert the branch into a newly regulated EU entity, which would act as the new passporting hub for the EU market. The effects would be similar to the previous example, but may involve asset transfers arising both from the branch itself and from the UK organization into the new entity.

Establishing new regulated entities has the potential to lead to the duplication of resources and associated costs. To minimize such inefficiencies, one option would be to retain as much of the staff and infrastructure as possible within the UK entity, and to outsource those resources to a new EU entity as needed. However EU regulators will require that any new regulated entity should be more than just a brass plaque. They will need their own senior management team accessible within the relevant jurisdictions, sufficient resources of their own such as their local regulations and an outsourcing arrangement that is compliant with local regulatory requirements.

If none of these options can be agreed, firms may need to consider a transfer of their operations.

How would a transfer be achieved?

Since we don’t yet know what a post-Brexit world will look like, it may not be either sensible or necessary to transfer a business out of the UK. But in the meantime, it is worth considering possible transactional structures during scenario and contingency planning, so if uncertainty continues and outcomes are not favourable then businesses can envisage the structure that best suits their needs.

When considering a business transfer it is important to look at the specific business that is transferring to determine what type of structure will be appropriate – there is no one structure that fits all. Important factors to consider will be:

  • What are the underlying regulated activities of the business concerned?
  • What are the assets and liabilities of that business?
  • How might customer contracts and third party contracts transfer?
  • Is this is a transfer of the whole business or parts of the business?
  • If part of the business, which parts will transfer, and how much should be retained in the UK?
  • What types of transfer are there?

There are four possible structures of transfer that could suit a financial services business. These are:

  • Business transfers
  • Part VII business transfers
  • Cross-border mergers
  • SE/Transfers using societas europaea

What is a business transfer?

A business transferis a bilateral sales and purchase agreement between the transferor and transferee under which all or part of the assets and liabilities would transfer from one country to another.

It is an extremely flexible structure, allowing the parties to grow what they like between themselves. It is not subject to any external timetable, not driven by court timetable or a regulators timetable. The structure of an agreement is not set out in statute or regulation, and can therefore be extremely flexible.

However a bilateral agreement between transferor/transferee has some significant drawbacks, particularly around its inability to transfer the burden of obligation of contracts. Businesses considering this option would need to look at ways in which they would get either third party consent or novations for agreements. Where businesses have wide ranging customer contracts it may well not be practical – there may be restrictions on transfers.

What is a Part VII Business Transfer?

Part VII refers to part vii of the Financial Services and Markets Act 2000, which sets out a structure for transferring the assets and liabilities of a business. It enables businesses to transfer those assets and liabilities without the consent of third parties and without the need to reach the consent of customers.

This is an extremely well trodden route, particularly in banking and insurance industries. However, not all financial services businesses can use the part VII process as it is only applies to certain specific types of activity, and is therefore available only for banking and insurance business transfers.

What is a Cross-Border Merger?

Licensed under Cross-Border Mergers Act implemented in the UK and other member states, a cross-border merger is available for businesses with a UK company and a separate EU incorporated company. The two companies would merge, with the UK company being absorbed into the EU company. All UK assets & liabilities would become those of the EU company, and the UK company would dissolve.

Cross-border mergers are based on EU legislation, so are only available so long as the UK remains a member of the EU. Though less well-trodden than part VII business transfers, they are increasingly popular. However, they do have some restrictions in usage, and may involve aspects that might be considered constraining to the business, such as the requirement to involve employees and employee participation in transaction structures.

What is a transfer using Societas Europaea?

A Societas Europaea (SE) transfer structure enables businesses to convert an existing UK company (PLC) into an SE – a particular type of company available in the UK and EU. A business choosing this option would initially have the registered office in the UK and then subsequently transfer the registered office to a different EU member state – effectively moving the company to a different state in the EU.

As with the cross border merger, the structure is based on EU legislation, so is only available during the UK’s membership of the EU. There are also similar restrictions in usage.

Where might I transfer/relocate my business to?

In light of Brexit, several EU states are seeking to take advantage and preparing themselves to attract and welcome UK businesses seeking to relocate. For financial services businesses, the three particularly eager countries are France, Germany and Luxembourg, all of which realize the potential in gaining UK business.


It is important to emphasise that at this moment in time, it truly is impossible to know what roles the UK and the EU will play in each others political and financial future. As demonstrated above, there are plenty of different approaches which may be taken and as such firms need to be aware of the consequences of these.

Needless to say, CPA Audit will be monitoring any developments closely and measuring their impact on the industry and their clients.

If you have any queries or require our assistance, please do not hesitate to contact the CPA Compliance team.

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