Brexit Draft Withdrawal Agreement: Key Points for Financial Services Firms

Implementation Period and EU Passports

The Draft Withdrawal Agreement provides for a 21-month implementation or transitional period, starting on March 29, 2019 and ending on December 31, 2020. During this period, the UK would remain a member of the EU single market and customs union and would still be subject to EU laws. This would mean that UK and EU financial services firms can continue to rely on existing freedom of establishment and freedom of services rights under EU law (EU Passports) during the transitional period and will continue to be directly subject to applicable EU Regulations.

For the implementation period to take effect, the UK and EU must finalize and ratify the Draft Withdrawal Agreement by March 29, 2019. On the UK side, ratification requires prior parliamentary approval under the UK European Union (Withdrawal) Act 2018 and a new UK Act of Parliament setting out implementation of the Draft Withdrawal Agreement. On the EU side, ratification requires approval of the European Parliament by simple majority and approval of the Council of the EU by qualified majority vote of at least 20 of the 27 other EU member states and representing at least 65 percent of their combined population. In other words, we will not know for certain whether EU Passports between the UK and EU will continue to have effect after Brexit until these ratification processes have been completed.

Once the Draft Withdrawal Agreement is ratified, the implementation period can be extended by joint agreement between the UK and EU. On November 18, 2018, the EU’s chief Brexit negotiator, Michel Barnier, proposed extending the transitional period to December 2022.

Equivalence

The Draft Political Declaration discusses the process for the EU and UK to determine whether certain of their respective rules are “equivalent” by the end of the transitional period. This is important for certain firms subject to certain EU financial services legislation, such as the recast EU Markets in Financial Instruments Directive and accompanying Regulation (MiFID II). MiFID II contains provisions for investment firms outside the EU to provide certain services to professional clients in the EU on a cross-border basis where the European Commission has determined that an investment firm’s home jurisdiction has rules that are “equivalent” to those in MiFID II. The commencement of equivalence assessments for the UK under MiFID II is therefore promising for UK firms, because they may be able to rely on these provisions to service EU clients if there is a positive equivalency determination.

However, the Draft Political Declaration states that the EU and the UK must respect one another’s “regulatory and decision-making autonomy” and “ability to take equivalence decisions in their own interest.” This suggests that the European Commission may withhold a positive equivalence determination where it considers this to be in the interests of the EU, notwithstanding substantive equivalence of a non-EU country’s regulatory and supervisory framework with that of the EU.

A broader point to note on “equivalence” is that there is currently no general third-country equivalence regime for non-EU banks, insurance companies or payment service providers that would allow them to provide regulated services in the EU without local regulatory authorization. While such firms would be able to continue to rely on existing EU Passports during the implementation period, that will change after the period – that is, from January 1, 2021. On that date, they will need to consider alternative arrangements for providing regulated services between the UK and EU, unless the regulatory regimes are amended to include new third-country equivalence provisions. If the Draft Withdrawal Agreement is not ratified by March 29, 2019, such firms will have to rely on contingency plans to address the loss of their EU Passports between the UK and the remaining EU member states as of that date.

Contingency Planning

On November 13, 2018, the European Commission published a communication setting out certain contingency actions in the event the Draft Withdrawal Agreement is not ratified by the UK and EU by March 29, 2019 (i.e., “no-deal Brexit”). The communication states that firms should accelerate preparations if the UK is no longer part of the EU single market, for example by adjusting their contracts or relocating capacities and activities to one or more of the remaining EU member states. This follows guidance from the European Supervisory Authorities, including an opinion from the European Banking Authority published in June 2018 on the need for financial institutions to prepare for Brexit.

The UK government published its own guidance on such contingency planning in August 2018 (available here). The UK Prudential Regulation Authority and the UK Financial Conduct Authority have also published guidance on preparing for Brexit (available here and here, respectively).

Next Steps

• The Draft Withdrawal Agreement will be put to a vote before the UK’s House of Commons on December 11, 2018.
• If the UK and EU finalize and ratify the Draft Withdrawal Agreement by March 29, 2019, the implementation period will take effect on that date.
• If the UK and EU do not finalize and ratify the Draft Withdrawal Agreement by March 29, 2019, the UK will leave the EU single market and customs union and cease to be subject to EU laws on that date, at which point EU Passports will cease to apply to firms providing services between the UK and EU.