Hanging in the balance: What Brexit could mean for financial services

As the debate surrounding a potential Brexit rages on, Keystone’s financial services and regulatory expert, Tony Watts, considers the impact a UK departure might have on this area.

While it’s difficult to predict exactly what the result will be if Britain chose to leave the EU, there’s no doubting that the potential effects on UK law and the legal profession itself could be significant. And amongst the industries facing a possible hit, lies financial services. If the UK opts to exit the EU, there would follow a period of two years of negotiation in which the terms of the exit and the UK’s future relationship with the EU would be finalised. Nevertheless, there are three areas of obvious possible impact.

1. Passporting. Under the terms of EU legislation, firms authorised in one member state of the EU can carry on business across the EEA. This is their right of free movement. A qualifying UK firm can ‘passport’ by establishing branches in one or other member states or by offering its services cross-border into one or all of them; it does not need to be separately authorised in those other states, but can rely on its FCA/PRA permissions. This can extend beyond investment services to some products, so it is possible to passport retail investment funds (“UCITS” via the UCITS Directives) and public offers of securities (via the Prospectus Directive) throughout the EEA.It’s not clear how (if at all) this would work under Brexit. Countries like Norway (which alongside Iceland and Liechtenstein are members of the European Economic Area (“EEA”)) do have passporting rights – on the basis that they accept all EU financial services legislation. Other non-EU members do not have such complete access (Switzerland, for example, has negotiated a number of bilateral treaties). So access to EU markets in financial services will depend on the deal that is actually done between the UK and other EU members.

2. Content of EU legislation. For many years, the content of UK financial services legislation has been to a large extent (though certainly not entirely) determined by EU single market legislation. Two current examples amongst many are the Mortgage Credit Directive (to be implemented in the UK in March 2016) and the new package of measures on market abuse (some of which is directly applicable but otherwise must be transposed into UK law by July 2016).

In many respects, however, these EU laws have resembled those already in force in the UK, showing at least a measure of UK influence on the shape of EU laws. Others (such as “bonus caps” and other remuneration restrictions) have been much more controversial and have gone ahead despite UK opposition. It may be that the UK will be able to access EU markets on a selective basis or on terms that enable it to reject parts of EU law it sees as too onerous. It would be ironic if it adopted a “Norway” solution – and the price of access would be accepting all EU single market requirements but not joining with other EU members in considering their content.

Technically, there may be a positive impact on UK regulation. At the moment, EU legislation is introduced in a way that sits uneasily alongside existing UK legislation (which sometimes goes further or extends wider than the EU legislation). This means that in order to determine whether and how a product or service is regulated, it is often necessary to look at both UK statutory rules, the relevant regulator’s rules and the EU legislation itself – a very complex exercise. Even the passport involves only acting within the scope of the EU legislation – not including activities of UK firms which are regulated but not within the narrower EU legislation[A1] . Depending on the result of any negotiations with the EU, it may be possible to simplify this – though a “Norway” solution would involve no real change and most (if not all) EU legislation would continue to apply.

3. Contracts. Many contracts in the financial services area – including standard client terms of business – will mention, rely on or imply EU financial services legislation. Again, depending on the terms of a Brexit, these contracts may need to be reviewed. There will be some circumstances (again, for example, a Norway-type situation) where change will be minimal or non-existent. A withdrawal from much EU legislation may involve widespread changes in many areas; even employment contracts may be affected by the remuneration rules on bonuses etc. no longer applying in the same way.With the above points in mind, it’s clear that a Brexit would involve many uncertainties for financial service firms, so it may be useful to consider these early on. For further information or advice on the topic, getting in touch with a lawyer to look at your options would be an ideal starting point.