House of Commons Treasury Select Committee – EU exit and transitional arrangements

As part of its inquiry into the UK’s future economic relationship with the EU, the Treasury Committee has recently issued a call for written submissions on transitional arrangements.

Transitional arrangements refer to any arrangement that takes effect between the point at which the UK formally leaves the EU and the point at which UK’s final, settled relationship with the EU becomes effective.

Andrew Tyrie MP, Chairman of the Treasury Committee, said:

“Many firms are understandably concerned that in April 2019, the Government’s current timetable for leaving the EU, they will be faced with a sudden change in their operating environment.

He added that transitional arrangements could offer firms some protection.

The Treasury Committee is inviting evidence from firms, trade bodies, regulators, experts and any other interested parties on a number of questions in relation to:

  • the desirability of transitional arrangements;
  • the design of transitional arrangements; and
  • the negotiation of transitional arrangements.

The deadline for written submissions on transitional arrangements is 31 January 2017. Please click here to access the link to submit a written submission.

The European Parliament – Third-country equivalence in EU banking legislation

The European Parliament’s recent briefing note focuses on the concept of equivalence in EU banking legislation and notably on the difference between “passporting” rights and “third-country equivalence” rights.

Once the UK leaves membership of the EU it will become a third-country in respect to EU legislation and no longer benefit from the EU passporting regime.

In a recent statement by the UK trade minister, Mark Garnier, he recognised that passporting was likely to end with the UK’s exit from the EU, but called for another relationship. He stated that third country equivalence to passporting was not going to be good enough for banks and called for a special version of passporting which would benefit banks based in the UK.

However, the briefing note states that the European Supervisory Authorities, who are responsible for carrying out technical assessments of equivalence, are under no specified deadline to come to an equivalence decision. In some cases it can take up to four years for decisions to be made. This makes it uncertain exactly how long an equivalence decision, or special passporting arrangement of some description, between the EU and the UK will take.

The European Parliament – Brexit: the UK and EU Financial Services

The European Parliament’s recent briefing note highlights the importance of the role the UK plays in the single market for financial services, and notes which activities rely today on passporting for their daily businesses with the other 27 Member States.

In 2016 the Global Financial Centres Index placed London as the leading global financial centre ahead of New York, Singapore, Hong Kong and Tokyo (a placing which largely predates the single market), therefore the importance of the London markets cannot be underestimated. It is also interesting to note that the existence of the single market is not the only reason why London has reached this leading position.

Banking activities

According to the Boston Consulting Group, setting up subsidiaries in the 27 Member States of the EU would increase global costs by 3% to 8% for investment banks and European banks with UK branches would also face higher costs.

In fact, European companies take advantage of the UK capital markets to reach potential investors and as a result, 46% of EU equity is raised in London and 35% of the wholesale financial activities of the EU takes place in London.

Additionally, many non-EEA banks use their London subsidiary to passport financial services throughout Europe. For example, it is estimated that the top five US investment banks locate about 90% of their European operations in the UK.

The importance of London as a global centre for financial operations is reiterated once more and the negative financial implications for Brexit look likely to affect not only European banks but also US banks.

Asset Management

London is the second largest centre for hedge funds after New York and the UK is the largest centre of asset management in the EU with a market share of 37% of assets under management.

Access to EU markets for UK fund managers is likely to be negatively impacted by the loss of the EU passport. If the AIFM Directive grants cross-border rights to non-EU firms, providing that equivalence is recognised by the Commission and the firm is authorised by ESMA, such equivalence rights do not exist under the UCITS Directive.

Although as noted in the above article about passporting, the UK trade minister, Mark Garnier believes that the UK will be able to negotiate a unique relationship with the EU along the lines of a third party equivalence but with much more beneficial terms than is usually the case.

Other financial services

The briefing note also provides information on the insurance and reinsurance sector and other professional services. Please click the article link at the end for more information on these topics.

Theresa May confirms UK to leave EU single market – what does this mean for financial services firms?

On 17 January 2017, Theresa May confirmed that the UK will leave the EU single market. Following her speech, we have a greater degree of clarity on what Ms May’s Brexit objectives are, but negotiations are yet to start and it is unclear, at this stage, how much the EU will be willing to concede to the UK as part of forging a new relationship. For financial services firms, leaving the EU single market will mean that passporting will not be an option and a new kind of equivalence model will need to be agreed, but at the moment it is unclear what the model will look like. What is certain is that there will be a great deal of regulatory change across UK financial services over the coming years.

TheCityUK paper on Brexit and UK-based financial and related professional services

TheCityUK has published a paper which states that the UK and EU should conclude a bespoke agreement that delivers mutual market access, transitional arrangements to allow enough time to implement the new relationship and access to talent. As part of TheCityUK’s work to define the shape of the bespoke deal, the paper sets out key considerations on each of these areas. They believe there will be opportunities arising from Brexit, including from new networks of trade and investment agreements, the creation of Sharia-compliant central bank liquidity facilities and FinTec. The paper considers points in relation to the following key areas:

  • Clear and upfront transitional arrangements
  • Access to talent
  • Market access
  • Marketing and dealing
  • Product standards
  • Market infrastructure
  • Framework

A Brexit update: Conclusion

In her Brexit speech, Theresa May said that EU leaders would be committing an action of ‘calamitous self-harm’ if they tried to punish the UK for leaving and it seems that the key role the UK’s financial services sector plays in the global economy is reason enough for this to be true. By leaving the single market and therefore access to the passporting system, it is not only UK firms that would suffer, but EU and US firms too. Equally, London’s prominence as the centre for financial services pre-dates the single market and so it seems likely that this position will continue once the UK exits the single market. Creating a new version of an equivalence model for the UK is something that needs to be considered, but the shape of this model remains uncertain, as does the time it may take to negotiate a model that is beneficial to the UK as well as the EU. However, as TheCityUK points out in their paper, they believe that Brexit and the UK leaving the single market will create new opportunities for the financial services sector. TheCityUK’s plans for a bespoke deal set out ways around some of the possible uncertainties the next few years will bring.

To access the full articles, please click below links:

House of Commons Treasury Select Committee – EU exit and transitional arrangements

The European Parliament – Third-country equivalence in EU banking legislation

The European Parliament – Brexit: the UK and EU Financial Services

TheCityUK Paper on Brexit and UK-based financial and related professional services

To access Theresa May’s full speech, please click below link:

Theresa May’s Brexit speech – 17 January 2017

For any further advice or information on Brexit, Cleveland & Co, your External In-House Counsel, are here to help.