Financial Services Legislation under the EU (Withdrawal) Act: safely onshored?

On 12 July 2018, the UK Government published its long-awaited White Paper on "The Future Relationship between the United Kingdom and the European Union". The paper is intended as a blueprint for further negotiations with Brussels. However, the Brexit blueprint has not necessarily been welcomed across the UK's financial and related professional services sector, with representative groups describing the propositions as "regrettable and frustrating" and a "real blow" for the sector (read more in our report).

Notwithstanding the critics, both the UK and the EU need to prepare for the (uncertain) post-Brexit future. Last month, HM Treasury (HMT) published a paper setting out its approach to bringing EU financial services legislation under the EU (Withdrawal) Act 2018. On 24 July 2018, HMT published a draft statutory instrument, the EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018. In this updatewe summarise some of the key points.

Background: ministerial powers under the EU (Withdrawal) Act 2018

The European Union (Withdrawal) Act 2018 repeals the European Communities Act 1972, the Act that brought the UK into the EU and gave EU law supremacy over UK law, on the day the UK leaves the EU. It converts into UK domestic law the existing body of directly applicable EU law in order to provide a functioning statute book as of exit date (29 March 2019).

The EU (Withdrawal) Act 2018 also gives ministers powers to make statutory instruments "to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law." These contingency preparations for financial services legislation are referred to as "onshoring", as they bring the relevant EU legislation into domestic UK law.

EEA passporting regimes and EU withdrawal

The UK's and EU's financial services markets are highly interconnected, largely due to the EU single market and the so-called EU passporting regimes that enable banks and financial services companies authorised in one EU/EEA Member State to trade freely in the others with minimal additional authorisation. Firms based in "third countries" (non-EU countries) do not benefit, or at least not fully, from these facilitating regimes and so face significant regulatory barriers to providing cross-border banking and investment services in many EU Member States. The UK's participation in the passporting system is implemented by the Financial Services and Markets Act 2000.

Although the recently published UK White Paper on the future relationship has been described in the own camp as "courageous and bold", the EU has expressed its concerns on the workability of the UK's proposals. Because "nothing is agreed until everything is agreed", both sides have to prepare for all eventualities, including a no-deal situation. If indeed the UK leaves the EU without a deal, there will be no agreed legal framework upon which the passporting system can continue in and to the UK. As a result, any references in UK legislation to the EEA passporting system will become deficient at the point of exit.

The absence of UK legislation to this effect would mean that banks and financial services companies currently operating in the UK via an EEA passport would lose their permission to do so as of 29 March 2019. As a result, these companies would not be able to continue to carry on regulated activities in the UK, with consequent harm to UK businesses and consumers.

Passporting regimes under the EU (Withdrawal) Act 2018

The now published (draft) statutory instrument, the (draft) EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018 is designed to minimise the disruption faced by EEA firms and UK businesses and consumers due to the loss of EEA passporting rights. It sets out the design and structure of a 3-year "temporary permissions regime", enabling EEA companies operating in the UK via a passport to continue their activities in the UK for a limited period after the UK's withdrawal from the EU.

To enter the "temporary permissions regime", companies would be able to apply prior to exit date or submit a notification of their intent to enter the regime within its duration (3 years after exit day). Once in the regime, EEA companies would be able to carry out regulated activity as before Brexit, writing new contracts and servicing existing contracts entered into before exit day, as if they were fully authorised in the UK. The scope of this activity would be limited to the scope of their previous EEA passport. Companies whose applications to the regime are successful would immediately become fully UK authorised and leave the regime.

Outlook

As exit day is coming closer by the day, it is vital to prepare for all eventualities in order to ensure that there will be no major disruption as of 29 March 2019. The recently published HMT (draft) statutory instrument is supposed to ensure that at least the financial services companies would not fall off the Brexit cliff edge.

Negotiations between the UK and the EU are ongoing and it remains to be seen when and if the parties agree on the terms of an "orderly" withdrawal and the future relationship. However, one thing that is apparent is the growing sense of urgency within the sector that negotiations with the EU must now progress quickly in order to secure an effective financial services regulatory relationship with the EU: minimizing the fragmentation of markets and facilitate continuity of business for the industry and its customers is vital for both the UK and EU economy.