This article first appeared in Scottish Financial News on 14 June 2016.

We have been considering with clients the impact of a Brexit vote in the forthcoming EU referendum on 23 June. The outcome will have a direct impact on businesses in the financial services sector in the UK and Scotland, as well as those in the wider economy who obtain finance or debt either through lenders (banks and other funders) or capital markets.

We have set out below some of our combined experience and understanding in this area, drawing on our strengths in financial services, our knowledge of the Scottish market and economy, and the expertise of our cutting edge public law team. More updates to follow.

Bruce Stephen Brodies LLP

Key EU law in the financial services sector

There is a raft of EU legislation that impacts upon regulated industries such as the financial services sector, including banking, insurance, investment services and financial products or funds. Leaving the EU would change the basis on which entities can operate across Europe. In the event of Brexit, UK firms that have been 'passported' into other EU member states and operate in these additional jurisdictions (on the basis of much lighter regulation provided that they comply with main UK regulator requirements) would likely be faced with additional local regulation.

They would, potentially, have to set up independently-regulated branches or subsidiaries in each country in which they operate in the rest of the EU ("rEU). The removal of the current 'passporting' arrangements would affect licences and authorisations for banks as well as ongoing regulatory compliance requirements, such as capital requirements currently subject to EU regulation.

Detailed rules applicable to products such as consumer finance contracts and mortgages are heavily influenced by EU law. At the very least a divergence of rules may affect access to rEU customers.

For the wider economy and trading businesses, the access to EU markets possible as a result of EU membership would of course be affected, unless it could be broadly replicated in trade negotiations and deals struck between the UK and rEU.

The extent of the impact would be heavily influenced by the form of trade and regulatory rules established between UK and rEU following Brexit.

Options include:

trading under the WTO rules;

a customs union (like Turkey);

entering into a number of bilateral agreements (like Switzerland); or

retaining European Economic Area status, conforming with most aspects of EU law and retaining single market access, but technically being outside the EU (like Norway).

While compensation schemes in respect of funds held on deposit operate on a national basis, they are subject to an EU framework.

Currently, the EU is on track for further integration, including in the area of capital markets and their regulation. In September last year, the European Commission adopted an action plan to implement the Capital Markets Union (CMU). The CMU affects a vast range of capital-raising activity, including securitisations involving Scottish assets through the new STS principles (Simple, Transparent and Standardised). It is designed to improve access to capital while at the same time protecting investors. The shape of the regulations as applied in the UK after a Brexit would remain to be seen, however we would assume that the UK would look to follow best practice in order to maintain its status as one of the leaders in Europe in this area.

What key changes might be likely in the event of Brexit?

Regulated businesses could have to deal with separate (and potentially diverging) regulatory requirements in the UK and rEU, in the event that the passporting rules no longer applied to the UK.

Product regulation is less likely to be an immediate issue, though divergent regulation across the UK and rEU would impact on compliance costs for those operating beyond the UK.

As well as considering the potential impact on market conditions for businesses in the UK, consideration should be given to the availability and cost of finance if the free movement of capital rules (one of the pillars of EU status along with the free movement of goods - people and services) no longer applied.

Asset values could be likely to be affected, at least in the short-term, by uncertainty following a Brexit decision. This may impact on the availability of new finance. To the extent that funders rely upon wholesale markets for liquidity, this may impact on the availability of funds, so it is important to consider this now. Terms of funding packages should be reviewed for the potential impact of increased costs.

Exchange rate risk and related product prices would have to be managed. Fluctuations in exchange rates may assist exports, provided demand and confidence is maintained.

It is impossible to predict the impact on inward investment to the UK, although investors generally seek investment in relatively stable markets so the politicians would want to achieve a stable environment for business and investment in the UK as quickly as possible. Perception of the UK as a 'bridge' into Europe may of course be affected.

Key threats and opportunities of Brexit for the financial services sector

The financial services sector employs over 2.1 million people and accounts for over 11% of economic output, so there can be no doubt of its importance to the UK economy. The EU is our single biggest export market. Scotland owes 7% of its GDP to the sector. Is there the potential opportunity for Scotland and the rest of the UK to become a more attractive regulatory environment while at the same time maintaining a robust system of market governance and prudent regulation, ensuring the market can cope with unforeseen shocks?

There may be investment opportunities as part of the need to consider the best locations for businesses' operations. EU firms that currently operate in the UK via the 'passporting' rules may have to set up separate operations here if they want to continue to service UK customers.

Certainly financial services firms should be considering investment mandates and product terms in light of possible changes to the regulatory framework and the potential impact on their customer base.

Consideration should also be given to product marketing arrangements.


The implications of the EU referendum for business are significant, and should be considered now. Plans should be in the process of being formulated with a view to putting your business in the best position going forward (whatever the outcome).

Bruce Stephen can be contacted on 0131 656 0260 or at