No-deal Brexit significantly impacts Finance & Banking sector – with consequences for business and personal customers
The UK Government published about one-third of the 84 no-deal ‘technical notices’ as a contingency to prepare for the great leap into the unknown at the end of August 2018.
For this article we focus on what it means for ‘Banking, Finance and Insurance’ – and the consequential impacts on business and individual customers in the UK and across Europe. It is necessarily more technical in nature than the majority of our insights, due to the detailed regulations that apply to insurance, banks and finance businesses. We will comment on the practical impacts and preparations that individuals and businesses need to take for a no-deal Brexit as our detailing work with the industry continues.
The UK Government has acknowledged that it has an overarching duty to ensure a functioning financial services regulatory framework - come what may.
It will become clear as this piece – which is built around the relevant ‘technical notice – unfolds, that the UK will need to enact a considerable number and range of ‘temporary measures’ in order to protect UK based individuals and companies in their daily business. It is equally clear that the EU has to match this in order to protect EU based citizens – and at the time of writing, it remains nothing more than the UK wish-list. It paints a stark picture of a no-deal Brexit.
Presently, the majority of the UK’s financial services legislation currently derives from EU law - and the UK meets or exceeds all legal requirements and regulations. This allows UK Finance businesses to “passport” products and services. Effectively, UK authorisation is accepted all other 27 EU Member States and the wider European Economic Area (EEA) without requiring any further local authorisation or supervision.
Some services are directly supervised by EU agencies - for example, credit rating agencies (CRAs) and trade repositories (TRs) are authorised and regulated by the European Securities and Markets Authority (ESMA).
If there is ‘no deal’ the UK will leave the EU at 23:00 GMT on 29 March 2019 – exactly 7 months from now. Many organisations are now actively working on the planning and preparations for ‘no-deal’ as the most likely scenario.
Earlier this year, Parliament passed the ‘European Union (Withdrawal) Act 2018’. This transfers all existing EU laws and regulations into UK law on exit day - including those relating to Financial Services.
At Brexit, all UK businesses fall outside of the EU’s framework. For financial services this means that regulations and relationships will be determined by each of the 27 remaining member states applying the generic EU rules for ‘third countries’. A third country is any nation outside the EEA bloc.
The UK government will apply these ‘third country’ rules to European based firms. Some exceptions may be allowed: to ensure a functioning legislative regime; minimise disruption; to give continuity of financial services provision; to protect the existing rights of UK consumers; or to ensure financial stability.
For example, under a temporary recognition regime (TRR), EEA firms currently passporting into the UK may continue operating in the UK for up to three years after Brexit, to allow time to apply for full authorisation from UK regulators.
This TRR would allow non-UK banks to temporarily provide clearing services to UK firms.
The government proposes further legislation on transitional arrangements for: Central Securities Depositories; Credit Rating Agencies; Trade Repositories; Data Reporting Service Providers; Systems currently under the Settlement Finality Directive; Depositaries for authorised funds.
The UK government will transfer functions currently carried out by European bodies to the appropriate UK body – and the Bank of England and the European Central Bank (ECB) will work together on managing the risks in financial services around 29 March 2019.
Implications for individuals and business customers
How customers will be affected depends on where they are based, where their firm is based, and under what regulatory authorisations they operate.
For UK-based customers accessing domestic services in the UK provided entirely by UK-based providers, there is unlikely to be any change as a result of exit.
There will be no change to their UK authorisation for EEA firms providing deposit taking and retail banking services in the UK via a UK-authorised subsidiary - and they will be able to continue providing services.
UK-based payment services providers will lose direct access to central payments infrastructure. Customers face increased costs and slower processing times for Euro transactions
The cost of card payments between the UK and EU is likely to increase. Cross-border payments will no longer be covered by the surcharging ban.
For UK-based customers who access banking, insurance, investment funds and other financial services with EEA firms currently passporting into the UK, the temporary permissions regimes will enable these firms to continue to provide those services to UK customers for up to three years after exit.
The UK’s Financial Services Compensation Scheme (FSCS) protects customers of UK-authorised firms who have eligible products in the case of firm failures - including some products with EEA firms. The regulators will consult on arrangements for continuing this coverage this autumn.
EEA-based customers of UK firms currently passporting into the EEA - including UK citizens living in the EEA - may lose the ability to access existing lending and deposit services, insurance contracts (such as a life insurance contracts and annuities) as UK firms lose their passporting rights.
Many UK financial services firms who currently passport into the EEA are taking steps to ensure that they could continue to operate after exit - for example by establishing a new EU-authorised subsidiary - allowing the UK firm to offer new services through its EEA subsidiary after Brexit.
HM Treasury has a duty to ensure that there is a fully functioning financial services regulatory framework at the point where the UK leaves the EU. Unless the EU acts to maintain continuity, however, UK financial services firms presently passporting into the EEA lose those rights at Brexit – and may not be able to meet contractual obligations with EEA-based clients as this would breach EU rules for ‘third country’ businesses.
The UK may unilaterally resolve this issue on the UK side. However, coordinated action with the EU is necessary to resolve the issues in the remaining countries. For instance, derivatives contracts between UK and EU financial firms where permissions may be necessary from both sets of regulators to support continuity of service provision. The UK government is committed to working with EU partners to identify and address such risks.
EU legislation allows fund managers to delegate portfolio management services to a third party in a third country – stipulating requirements for cooperation between each of the supervisory authorities. The UK is ready to agree cooperation arrangements with their EU counterparts to bring the UK into line with other third countries.
Intra-UK clearing services (CCPs) continue as today. The UK government temporary regime will enable non-UK CCPs to provide services to the UK for a period of up to three years. However, without EU action, EEA clearing members and trading venues will no longer be able to use UK CCPs to provide their clearing services.
The UK’s Central Securities Depository (CSD) currently provides services to both the UK and Irish markets. For customers settling UK securities at the UK CSD there will be no change. However, if no action is taken by the EU authorities and EU countries, EU securities may no longer be able to be directly settled in the UK.
CSDs may be subject to transitional provisions - further details on this regime are expected from HM Treasury and the Bank of England in September 2018.
When the UK leaves the EU, it will no longer be a part of the EU Settlement Finality Directive (SFD) framework. Designated Financial Market Infrastructures (FMIs) benefit from protection from insolvency actions. A temporary regime would enable some non-UK FMIs to continue to benefit from UK protection. However, without EU action to designate UK FMIs, EU settlement finality protection for UK FMIs will cease to be in place – meaning EU customers represent higher risks to these FMIs - and may no longer be able to access their services.
Without action from the EU, UK trading venues would no longer qualify as EU trading venues. This would reduce market liquidity in the UK and EU.
EU market operators that currently passport into the UK do not have to be recognised by the Financial Conduct Authority (FCA) in order to have UK firms participate in their markets.
The government intends to give the FCA powers to authorise and regulate both UK and non-UK Credit Rating Agencies (CRAs) and Trade Repositories (TRs) after Brexit. However, if no action is taken by the EU, EEA firms will no longer be able to access these UK firms.
The government will publish a separate technical notice on transfers of personal data between the UK and the EU. Organisations that receive or transfer personal data between the UK and the EU (including financial institutions) should refer to this document for further information on preparing for a no-deal Brexit.
The EU internal market for financial services is highly integrated, underpinned by common rules and standards, and an extensive supervisory cooperation between regulatory authorities at an EU and member state level.
Firms, financial market infrastructures, and funds authorised in any European Economic Area (EEA) country can carry out many activities in any other EEA country through a process known as “passporting”, as a direct result of their EU authorisation, or via similar arrangements. This means that if these entities are authorised in one member state, they can provide services to customers in other member states, without requiring authorisation or supervision from the local regulator.
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