Brexit will fundamentally alter the UK's relationship with the EU and will have a profound effect on the landscape of financial services in Europe. Ireland is the logical relocation choice.
This paper considers the potential impact that Brexit may have on the main UK financial services sectors and explains why Ireland should be a logical relocation choice for those firms who may decide to transfer part (or all) of their business from the UK to an EU hub post-Brexit.
Accepting that real negotiations can only begin once the UK election is over, it seems likely that those negotiations are going to be tough, hard fought and also complicated by conflicting or competing interests both within the UK and within the EU 27. In addition, hard positions adopted publicly now may be difficult to back down from or to compromise on down the line.
The UK Prime Minister has already indicated that the UK intends to exit the single market and to negotiate an extensive free trade agreement with the EU. Such an approach seems to rule out European Economic Area ("EEA") membership; that will mean that UK regulated financial services firms and credit institutions will lose the ability to passport their services into EU Member States without the need either for local branch or local subsidiary authorisation.
This position will present a major difficulty for those UK financial services providers that actively target EU customers, as well as for those non-EU entities that passport into Europe using an authorised UK subsidiary. To put the scale of the issue in context, according to figures from the Financial Conduct Authority, published by the House of Commons Treasury Select Committee1, close to 5,500 UK-registered entities rely on passporting to do business in other EU countries.
While it is extremely difficult to predict exactly where we will be in two years from now, it does seem likely that the outcome of the negotiations will be a UK outside the EU Single Market and Customs Union. For this reason, we have based this paper on the assumption of a "hard" Brexit.
EQUIVALENCE - EQUIVOCAL AT BEST
Certain commentators have suggested that, with the loss of passporting, access for UK financial services firms to the EU market could readily continue under "equivalence"; a system whereby the EU grants access to the Single Market to non-EU (or "third country") financial services firms that have legislation deemed equivalent to that in force in the EU.
However, this would seem a less than ideal proposition, as it is for the EU to decide whether equivalence has been met by any third country, including the UK. Even if some bespoke alternative to the current equivalence regime were put in place specifically to accommodate the UK, it is likely that the EU would retain a veto on approval, which leads to uncertainty as to timing and potentially as to outcome.
To facilitate equivalence, the EU would most likely require that the UK retain equivalent legislation to that already in place and also to replicate future EU legislation in the relevant area. These requirements may not be particularly palatable to the UK.
The International Regulatory Strategy Group has carried out a detailed analysis2 of the EU's existing third country equivalence regime to ascertain if it provides a possible solution to allow the UK-based financial services industry cross-border access to EU-markets following Brexit. Their report found that equivalence measures are not sufficiently robust and that, in any event, only a limited number of financial services sectors that are currently able to avail of the passporting regime can seek to utilise equivalence provisions, with several areas currently covered by passporting having no equivalence regime at all. These include banking (deposit taking), lending, payment services, mortgage lending, insurance mediation and distribution; and activities relating to the management of UCITS.
Given the unpredictability and limited availability of equivalence regimes, UK financial services providers cannot simply hope for the best.
THE EXPIRED PASSPORT
The impact of a loss of passporting rights will be felt across a wide spectrum of financial services activities.
Banking, Debt Capital Markets and Securitisation: For UK regulated banks, including the thousands of third country banks who use the City of London as their EU hub, a hard Brexit may mean that they will no longer be able to offer regulated services on a cross border basis into an EU Member State in the absence of becoming authorised in such Member State. The passporting regime contained in the Capital Requirements Directive3 allows deposit taking institutions to carry out services such as lending and deposit taking throughout the EU on the basis of their home state authorisation. It appears likely that this will be lost by the UK post-Brexit, which we have already seen is leading to many UK institutions moving some operations to an EU Member State to ensure that they can continue to access the EU markets efficiently. Ireland is a well-established location for international banks, some of whom have already announced plans to significantly expand their Irish operations in light of Brexit. Interestingly, the Bruegel Institute, a Brussels based think tank, estimates that almost a fifth of wholesale finance activity within the EU could shift to Ireland as a result of Brexit4.
On the capital markets side, the likely result of Brexit is that the ability for the UK to passport prospectuses throughout the EU will be lost. This means that any prospectus issued by a UK issuer would require approval from each individual EU Member State in which it is proposed securities will be offered or listed. For wholesale debt offerings, which – if not listed – generally benefit from an exemption under the Prospective Directive5 , this may not be all that notable, but it could have a significant impact on retail offerings. The Irish Stock Exchange (the "ISE") is one of the leading exchanges in the world for listing by special purpose vehicles ("SPVs"), providing a sophisticated listing service for debt securities.
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2 The International Regulatory Strategy Group "The EU's Third Country Regimes and Alternatives to Passporting" – January 2017
3 Directive 2013/36/EU
4 André Sapir, Dirk Schoenmaker and Nicolas Véron "Making the best of Brexit for the EU27 financial system" – 8th February, 2017
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