The right to passport services and financial products are only available to firms operating within the European Economic Area (EEA). Brexit will make the UK a â€śthird countryâ€ť. If EU and UK cannot agree on a contractual basis for mutual market access, UK-based firms, passporting into other Member States, will need to either establish a subsidiary in the EEA and take advantage of its full passporting rights or establish branches in each country where they wish to do business locally and hope to rely on grandfathering being available for these branches when the UK leaves the EU. The same applies vice versa for EEA firms currently passporting into the UK.
Although EU law allows the recognition of third countries as equivalent, the concept of equivalence cannot be seen as suitable substitute to passporting rights. Since Brexit would allow the UK to take advantage of more flexibility in regulation, it is unlikely that the UK would maintain an equivalent regulatory regime. And even if there is an equivalent regulatory environment, certain financial services would not be covered by equivalence, including services falling under CRD IV (including lending and deposits) and payment services. This means, that in particular deposit-taking as well as lending cannot be passported by a third country regardless of its recognition as equivalent.
In consequence, if there is no transitional agreement or agreement on mutual recognition, UK-based firms need to prepare for a regulatory environment in which there are no special access arrangements into the EEA.BACK
Currently, all EEA Member States benefit from passporting rights based on the EUâ€™s single market directives, which include Solvency II.
Insurance groups based in the EU with UK subsidiaries as well as European entities transacting with UK based firms might have to apply stricter rules for capital purposes under Solvency II if the UK is not regarded as â€śequivalentâ€ť under this regulation.
Under the current EU Prospectus Directive, issuers can passport prospectuses that have been approved by their home competent authority into other EU Member States. According to the planned new Prospectus Regulation, the European Commission may declare a third country prospectus rules to be equivalent to the Prospectus Regulation which, however, requires the adoption of further cooperation arrangements and will not provide a level playing field for parties Â from equivalent third countries.
So, following Brexit, UK issuers of financial instruments / securities will likely need the approval of a local regulator in the EEA. Reliance on equivalence will not provide the same effective access to the EU market.
Financial services firm authorised in their EU countries can use passports to provide services cross-border into other Member States either through a local branch or directly without facing additional registration, authorisation or licensing obligations in that host Member State. UK based banks as well as all other market participants cooperating with UK based banks, such as fintechs, will have to establish operations in an EU Member State in order to maintain access to markets in other EU Member States.
MiFID II and MiFIR will apply in the UK from 3 January 2018. With UKÂ´s formal withdrawal from the EU, it will depend on whether the UK can make use of the third country provisions to access EU markets as equivalent party. Bearing in mind, that UKÂ´s financial authority, FCA, has already raised certain concerns about parts of the MiFID II regulation, it is not yet clear whether UK will continue on the implementation of MiFID II after Brexit.
Brexit is likely to have significant impacts on the way fund managers are able to manage their UCITS as well as their AIF funds in the UK and to market such funds into EU Member States. Assuming the UK is given third country status,Â the product marketing and the provision of nearly all relevant services as asset manager will be affected and restricted to a large extend.
As a consequence, additional and separate licenses in EU Member States should be considered as well as restructuring measures on group levels and relocation of certain fund structures.
Unless UK and EU agree on specific arrangement, payment services firms will possibly not be able to provide payment services cross border from the UK into the EEA or vice versa other than in accordance with local law and the policies of local regulators.
Fintechs building their business model on certain API services based on PSD II might need to reconsider the regulatory environment post Brexit.