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      Financial services


      Current state of play

      • The UK is seen as the key financial centre of the European Union and as an attractive location for financial services businesses. Many banks and other financial services companies are headquartered in the UK, and many others see the UK as a place they need to be and a convenient location from which to access the wider European market. 
      • EU directives allow financial services firms authorised in one member state to carry on business in any other member state without the need for a separate host state authorisation (the so-called passport system), either by establishing a local branch or on a cross-border basis.
      • The passport system is supported by an extensive body of EU directives, regulations and subordinate legislation and guidance. EU supervisory authorities have significant powers. A lot of new legislation has been, and is continuing to be, introduced as a result of the financial crisis to address conduct issues and risks to financial stability. Much of the UK regulatory regime is derived from Europe.
      • Whereas in the past the focus of European financial services regulation has been on establishing minimum standards, in recent years there has been a trend towards maximum harmonisation and a 'single European rulebook', which is overseen by the system of European supervisory authorities: ESMA; the EBA and EIOPA.
      • EU legislation establishes the respective responsibilities of home and host state regulators for business with a cross-border element and provides a framework for regulators to cooperate with each other, both in relation to routine supervisory activities and in special cases such as changes of control, recovery and resolution planning and investigations.
      • In some areas EU legislation provides a framework within which non-EU firms may access the EU single market. This is generally restricted to wholesale business and depends on the non-EU regulatory regime being assessed as equivalent to the EU regime. It is also generally dependent on cooperation agreements being in place between the relevant authorities in the non-EU country and the EU. 
      • One interesting development is the likely delay to the overhaul of the EU markets in financial instruments rules (MiFID II). Presently, MiFID II is due to come into effect on 3 January 2017. However, the application of the rules is widely expected to be delayed by at least a year. Such a delay would mean that the legislation could become binding after a vote to leave but before a Brexit. As a result, affected firms would still have to implement the extensive new rules even while the UK was negotiating its future relationship with the EU.

      What should I be thinking about now?

      • Access to EU and UK markets
        • If my business currently relies on the passport system to provide financial services from the UK to the rest of Europe or vice versa, would I still have these rights on a Brexit?
        • If not, what would be the status of existing branches of UK firms in the EU, and of EU firms in the UK? To what extent might an EU equivalence regime give me the market access I need?
        • As a business headquartered outside the EU and currently accessing the EU market through a UK subsidiary, or as a UK headquartered firm, how would my structure and strategy be affected by a Brexit? Should I consider establishing a subsidiary in a country that will continue to remain in the EU?
        • At what stage should I think seriously about precautionary steps to ensure business continuity in the face of the risks posed by a possible Brexit?
        • With the likely delay to MiFID II until 2018, should I take account of a possible Brexit in my MiFID II planning?
      • Market infrastructure: as a trading venue or clearing or settlement system based in the UK, to what extent might regulatory restrictions or action by EU authorities curtail the ability of EU-based firms to use my services after a Brexit? Would a Brexit limit my rights to link up with EU-based market infrastructures? Would the ECB’s location policy be relevant again?
      • Remuneration: I am a UK firm currently subject to the bonus cap and remuneration rules: will these rules be relaxed or disapplied following a Brexit? I am an EU firm with a UK business: will I continue to be subject to the EU remuneration rules? Will this make it harder for me to attract and retain talent compared to UK firms?
      • Establishing and marketing funds: as a fund manager currently taking advantage of rights to market my funds in the EU, would I need to re-domicile my funds or my fund management activity to enjoy the same market access in the future?

      What could the position be following a Brexit?

      The answers to many of the above questions would depend on the nature of a post-Brexit UK/EU relationship.

      To give an idea of the range of possible outcomes, we have considered what the position would be under the ‘Norwegian option’ and the ‘World Trade Organisation (WTO) option’ – on the basis that these are at opposite ends of the spectrum of existing models for an alternative relationship with the EU.

      What if the UK leaves the EU but joins the European Free Trade Association (EFTA) and remains part of the EEA? (the Norwegian option)

      • EEA and EFTA membership would allow the UK to retain access to the single market in financial services. However, it would still have to comply with EU single-market rules made by the EU institutions.
      • A number of post-crisis single-market measures across the EEA have been delayed by problems arising from the scope of the powers that pan-EU regulatory authorities would have in the EEA states. Those problems are now being resolved, and accordingly there should be no change to either UK firms’ ability to do business elsewhere in the EEA or the ability of firms based elsewhere in the EEA to do business in the UK.
      • However, the UK would have significantly less power to influence single-market rules. If those rules changed, the UK would have to accept them.

      What if the UK left the EU without any form of free trade agreement? (the WTO option)

      • The UK would no longer be part of the single market and would lose all its influence over EU legislation.
      • The ‘passporting’ of licences would cease to apply.
      • Under a number of single-market directives and regulations, UK firms would not be able to maintain access to the relevant EU markets unless UK legislation remained equivalent to EU rules. No access is allowed in some areas. For example, under EU law, the management company of an undertaking for collective investment in transferable securities (UCITS) must be an EEA firm.