Can You Mitigate the Effects of Potential “Hard Brexit” on Financial Services and Instruments between the EU and the UK?
The UK Parliament rejected the proposed Brexit withdrawal agreement on 15 January 2019. The withdrawal agreement included an implementation period from March 2019 until the end of December 2020, which would have allowed financial service firms and funds to continue benefiting from passporting between the UK and the European Economic Area (EEA). In the event that Brexit materialises on 29 March 2019 without the withdrawal agreement, the passporting regime for financial services firms will expire abruptly as the UK leaves the EU, which will create a potential “cliff edge” for certain cross-border financial service providers between the UK and the EEA.
Although several possible scenarios regarding the effects and the timing of Brexit still exist, there are certain actions that financial service providers authorised in the EEA may take to protect their right to continue doing business in the UK even if its departure from the EU takes place on 29 March 2019 without the withdrawal agreement. However, such actions are available only prior to 29 March 2019.
Post-Brexit Temporary Permission Regime for EEA Firms and Funds
The UK has introduced a temporary permission regime (the “TPR”) for EEA firms and funds allowing certain EEA firms and funds to continue to operate in the UK after Brexit under certain conditions. The TPR is applicable among others to investment firms, payment institutions and electronic money providers, provided that the firm has a passport in place under Schedule 3 of the British Financial Services and Markets Act 2000 (the “FSMA”) prior to Brexit. In addition, for the TPR to apply, the firm must notify the relevant authority of its intent to use the TPR by 28 March 2019. For most of the financial service firms, this relevant authority is the UK’s Financial Conduct Authority (the “FCA”), but for banks, insurers and significant investment firms the relevant authority is the Prudential Regulatory Authority (the “PRA”). The notification to the FCA must be made through the FCA’s Connect system. However, as the PRA’s approach differs materially from that of the FCA, it is advisable that the banks, insurers and significant investment firms contact the PRA to discuss their situation.
The TPR is also planned to be applied to both UCITS and Alternative Investment Funds, enabling the funds to continue marketing their funds in the post-Brexit UK. The TPR for funds is currently waiting for the UK Parliament’s approval. The notification must be submitted to the FCA via Connect prior to Brexit, and it is possible to file the notification before the TPR for funds will enter into force.
UK Firms’ and Funds’ access to the EEA after Brexit
The EU or the Member States have not introduced a legal framework similar to the TPR. Consequently, UK firms and funds will become third-country firms under the EU’s financial markets regulation overnight at the time of Brexit in the absence of withdrawal agreement between the UK and the EU. In practice, the existing passports under the EU financial market regulation will expire. As the operating models, locations and licenses of the UK firms and funds differ materially, their post-Brexit access to the EEA should be assessed separately.
Certain EEA countries, including Finland, have discussed the possibility to “grandfather” UK firms’ and funds’ pre-Brexit client contracts to secure contract continuity. Securing contract continuity has been supported by pragmatic arguments, suggesting that continuing to fulfil contractual obligations should not be considered as offering financial services and, consequently, UK firms and funds should not be required to apply for new licenses within the EEA after Brexit as far as pre-existing contracts are concerned. This possibility has also been discussed in the recent Finnish government bill (277/2018vp), suggesting that the Finnish Financial Supervision Authority (the “FIN-FSA”) could provide further guidance on interpreting as to if and when contract continuity could be applied. However, at the date of this Legal Alert, the government bill is pending for the Finnish Parliament’s approval, and the FIN-FSA has not provided any further interpretation guidance regarding the contractual continuity in relation to UK firms and funds.
We will continue to closely monitor the relevant legislative processes and regulators’ approach on the matter.
Post-Brexit Passporting of Prospectuses Not Possible
The EU prospectus framework affords a so-called “passporting” possibility for prospectuses approved by a national competent authority in an EEA state (for instance, the FIN-FSA in Finland or the FCA in the UK). In a hard Brexit scenario, such passporting will no longer be possible, and issuers wishing to offer securities to the public or apply admission to a regulated market in the UK will be required to secure approval of their prospectuses from the FCA. However, the prospectuses that have been passported prior to hard Brexit will be grandfathered for use in the UK until the prospectuses are valid, i.e. up to 12 months from their date. Therefore, passporting a prospectus prior to 29 March 2019 may be worth considering, if an EEA issuer will need to use the prospectus in the UK. Absent any further UK legislation, issuers wishing to access the UK’s capital markets for offers to the public or admissions to a regulated market will be required to seek approval for their prospectuses from the FCA. However, issuers who require for their instruments to be listed on a EU regulated market will need to consider primary or at least secondary listings outside the UK. In such case, the prospectus would need to be passported from the UK to another EEA state also within the said timeline, or the issuer will need to seek separate prospectus approval for such EEA listing.
Borenius’ lawyers are available to assist in addressing any questions you may have regarding this legal alert. Please feel free to contact any of the Borenius’ attorneys listed in this alert or those with whom you usually work.