UK: What Might Brexit Mean For Financial Services?

Last Updated: 7 September 2017
Article by Bruce Stephen, Marion MacInnes, Christine O'Neill and Charles Livingstone

On 29 March 2017 the UK's Article 50 Notice was delivered to the European Council in Brussels, triggering the formal process for the UK's exit from the EU.

Immediately following delivery of the notice, the UK Government's Department for Exiting the European Union issued a White Paper on the Great Repeal Bill (entitled "Legislating for the UK's withdrawal from the European Union"). The paper focuses on the legal changes that will result from the UK's exit from the EU. The Government's aim is one of stability: to ensure that "the same rules and laws will apply on the day after exit as the day before".

The intention is that the Great Repeal Bill will repeal the European Communities Act 1972 (giving effect in UK law to the UK's exit from the EU), while at the same time ensuring that the body of EU law (known as the "acquis") as it exists at the time of Brexit is preserved in domestic UK law. Pre-Brexit EU law would therefore continue to apply unless and until such time as the UK Parliament (or, where appropriate, the devolved legislatures) decided to make any amendments. This has a number of advantages in the financial services context, not least the ability to demonstrate that post-Brexit UK law provides for equivalence with EU law, with corresponding benefits for third party or other equivalence tests which might apply to the provision of financial services across Europe.

The UK's Article 50 Notice stated that negotiations around Brexit and the UK's continuing relationship with Europe should be run in tandem, but the EU looks likely to prefer a phased approach that deals with the immediate terms of exit first. Politicking aside, it is hard to see how one can be agreed without a clear view of what the other will look like, at least in principle. The future UK-EU relationship is an issue of particular importance for the UK financial services industry, which has national importance in itself - as at March 2016, nearly 2.2 million people in the UK worked in financial and related professional services, with two-thirds being employed outside London. Financial and related professional services contributed £190 billion to the UK economy in 2014, representing 11.8% of UK economic output (The City UK 'Key facts about UK Financial and Related Professional Services' March 2016).

We have set out below some of the key considerations for market participants in the financial services industry, including finance providers and borrowers.

The Financial Services Regulatory Regime

The Prime Minister made it clear in her Lancaster House Brexit speech on 17 January 2017, which set out the UK's 12 key objectives and ambitions for the Brexit negotiations, that the UK does not intend to remain part of the Single Market. Instead the UK will seek the greatest possible access to the Single Market through a "bold and ambitious", fully reciprocal, comprehensive free trade agreement. Such an agreement could take in elements of the current Single Market regime, including the freedom to provide financial services across national borders (known as "passporting").

The potential impact of Brexit on the UK financial services sector could be significant. Much will depend on whether the UK Government can negotiate a bespoke free trade agreement that allows the provision of services, ideally encompassing the equivalent of reciprocal passporting rights for UK and European businesses.

Passporting, third country regimes and equivalence

EU legislation has driven much of the UK's financial services legislation in recent years. The advent of the European Single Rulebook has resulted in the harmonisation of financial services legislation across EU Member States and a unified regulatory framework for the EU financial sector through directly applicable EU legislation.

The Great Repeal Bill will transpose EU law into domestic law. Assuming that the UK Government will seek to maintain the UK's competitive position in the financial services sector, and to reduce both uncertainty for businesses operating in the sector and the costs associated with the implementation of new operating and regulatory procedures, it seems likely that many aspects of the existing EU financial services regime will be retained post-Brexit, at least in the short-to-medium-term.

However, unless the UK and EU agree alternative arrangements as part of a comprehensive free trade agreement, the UK's exit from the Single Market will result in the loss of the passporting rights that allow UK-authorised firms to provide certain financial services in European Economic Area (EEA) countries without having to obtain a separate licence in any of those countries. In such a scenario, Brexit would result in the UK acquiring "third country" status. Some EU financial services legislation affords third countries limited access rights where the country's regulatory regime is considered "equivalent" to the EU, and this could help mitigate the effects of any loss of passporting.

Third country rights are not, however, a reliable substitute for all passporting rights. Not all financial services (including core banking services such as deposit taking, lending and payments) are covered by the third country equivalence regime. Where the regime does apply the European Commission is not obliged to grant a determination of equivalence, and such determinations can take years or ultimately be refused on political grounds. However, if no agreement can be reached on continued passporting, the UK will hope to get the EU to at least agree that a determination of equivalence can take effect upon Brexit. The requirement to maintain an equivalent regulatory regime would mean the UK having to follow changes in EU rules. While this would be inconsistent with the aim of taking back control of legislative and regulatory functions, the UK Government has recognised that the UK may have to accept EU rules in areas where continued equivalence is necessary or desirable.

What are the alternatives?

Should the UK Government fail to achieve a free trade agreement affording the desired level of access to the Single Market, UK firms that currently rely on passporting to provide financial services in the EEA may need either to establish a branch in a remaining EEA State and apply to the local regulator for authorisation, or establish a subsidiary in an EEA State, which would then be eligible to apply for full passporting rights. Establishing a subsidiary could have capital implications for banks and certain other financial institutions, and may mean certain business operations transferring out of the UK.

For those EEA firms which operate in the UK via passporting rights, new authorisations may be required from the Financial Conduct Authority and the Prudential Regulation Authority.

Brexit bites: the impact on loan documentation

Businesses that are based in, trading with, or investing in the UK have been questioning the implications of Brexit on both existing and impending financings. From a documentation perspective, there are a number of key points for borrowers and lenders to consider when analysing and drafting loan documents:

  • Choice of law and enforcement

    Courts in the UK are required to give effect to the parties' choice of law under the Rome I and Rome II EU Regulations (the 'Rome Regulations'). There may well be a willingness to agree that the Rome Regulations should continue to apply to the UK post-Brexit, but European courts do in any event tend to recognise parties' express agreements on choice of law, regardless of whether it is the law of an EU Member State. Scots law is likely to remain a popular choice of law and, while automatic mutual recognition may not continue between UK and EU courts (as the basis for mutual recognition derives from the Rome Regulations), reciprocal recognition may well continue albeit in a different, and perhaps more inconsisent, form.
  • Illegality

    Creditors may wish to include contractual provisions providing greater flexibility to lend in certain jurisdictions. Illegality provisions in documents may enable creditors to demand repayment if it becomes illegal or unlawful for them to maintain their participation in a loan (for example, if a UK Bank could no longer lend in a Member State due to a loss of passporting rights).
  • Increased costs

    Typical increased costs clauses often contain drafting derived from EU legislation such as Basel III and CRD IV (being the reforms to the international prudential framework for capital requirements, and associated implementing agreements or legislation). As a high level of analysis has been carried out in terms of banks' understanding of how such provisions are applied, it is anticipated that such rules would continue to apply in the UK, but their application may differ from that adopted by the EU over time. As such, there may be greater focus on how increased costs clauses are drafted.
  • Article 55 of the Bank Recovery and Resolution Directive (BRRD)

    The main aim of Article 55 of the BRRD is to equip EU national authorities with powers to tackle crises at banks as quickly as possible by including contractual terms in certain agreements obliging counterparties to recognise certain write down or recovery powers available to national regulators in EU Member States. If the UK does not remain within the EEA post-Brexit, EEA financial institutions would have to include specific contractual "bail-in" clauses in documents governed by Scots (or English or Northern Irish) law in order to comply with Article 55.
  • Material adverse effect

    Material adverse effect clauses generally empower creditors to terminate lending arrangements due to the occurrence of an event or change which could have a negative impact on the borrower or the borrowing arrangements. Whether Brexit constitutes a material adverse effect will depend on the drafting of the documents, and will be considered on a case-by-case basis. However, it seems unlikely that Brexit in itself will trigger a MAE event of default under standard provisions of a loan agreement based on the Loan Market Association form. MAE provisions are very much a last resort provision for funders and are seldom (if ever) invoked, but Brexit may test that approach depending upon the longer term economic impact of any trade deal.
  • Withholding tax

    Gross-up baskets may be relevant as, although allocation of risk tends to rest with the borrower, both parties will want as little cash leakage as possible. Borrowers should consider the make-up of lending syndicates to see whether withholding tax issues might arise following Brexit. The rules are based more on treaties than on EU membership, although there may be a re-writing of some of the arrangements as a result of Brexit.
  • Financial collateral

    The European directive relating to financial collateral arrangements was implemented in the UK by the Financial Collateral Arrangements (No. 2) Regulations 2003. The Great Repeal Bill should therefore ensure that these Regulations continue to be in force following Brexit. Going forward, it will be for the UK Parliament to decide whether the legislation should be kept in its current form, or whether it is repealed or reformed. Given the importance of the legislation to the UK markets, however, in the absence of agreement it is anticipated that any change would be preceded by holding measures to ensure consistency in the interim.
Market impact: focus on infrastructure finance

As set out above, while it does appear that loan documentation is unlikely to require major changes in the run up to and post Brexit, the wider market impact must also be considered. Taking the example of the infrastructure sector, one potential consequence is that European Investment Bank (EIB) funding will be lost. Over the past five years, the EIB has accounted for 19.5% of all debt raised for UK infrastructure projects – however, its rationale is mainly to invest in improving infrastructure in Member States, related European Free Trade Association States and potential accession States, so alternative sources of investment may need to be found in the UK. Additional funding costs may arise as a result, as the EIB has provided funding at a relatively low cost.

One new source of funding may come from the UK Government, which will no longer have to finance its 16% shareholding in the EIB. In Scotland in particular, the Scottish Government now has enhanced borrowing powers that can be used to raise funds for investment in new Scottish projects. Innovative funding solutions are also being examined to minimise the impact of Brexit, such as utilising the capital markets to fund projects, as took place on the recent £370 million bond issue by Aberdeen City Council (on which Brodies acted for the Council). In the infrastructure sphere this type of financing may be particularly suitable, due to its long term nature and the flexibility of interest and capital payment terms.

Restructurings/insolvency

The current insolvency and administration rules for corporates are set out in UK legislation. However, the application of those rules to entities registered across Europe and the recognition of proceedings raised in EU Member States are subject to the EU Insolvency Regulation. Whether a particular enforcement procedure is available in respect of an entity, or proceedings will be recognised by other EU Member States, is currently down to the location of the entity's centre of main interests (COMI). Accordingly, an EU corporate registered outside the UK may be subject to insolvency or administration proceedings in the UK if its COMI is in the UK. Similarly, a UK corporate may be subject to proceedings in another EU Member State if its COMI is in that state.

If the EU Insolvency Regulation were to be incorporated into UK law by the Great Repeal Bill, the current rules would continue to apply in the UK after Brexit. However, while the Great Repeal Bill could require UK courts to recognise EU Member State proceedings in respect of an entity that has its COMI in that Member State, it cannot unilaterally require other Member States to reciprocate. With that and similar issues in mind, the Government's White Paper on the Great Repeal Bill notes that there may be little point preserving EU laws that are based on reciprocity between Member States unless there is agreement on that reciprocity continuing post-Brexit.

To maintain the full benefits of the EU Insolvency Regulation the UK and EU will have to agree that reciprocity will be preserved between the UK and the other Member States. Otherwise, UK insolvency law permits the winding up of entities whether registered in the UK or not, provided the relevant UK court has jurisdiction. Accordingly, there is a default position under UK law that would allow proceedings to be raised in the UK to deal with UK assets. Similarly, the UK administration regime is currently available in respect of UK entities, EEA State entities and companies not incorporated in an EEA State but having their COMI in a Member State (other than Denmark). This position would continue unless amended post-Brexit.

However, UK insolvency procedures would not benefit from automatic recognition under the EU Insolvency Regulation. The pre-EU Insolvency Regulation procedure would need to be followed, meaning an application to the courts of the relevant EU Member State for the UK proceedings to be recognised. Similarly, EU insolvency proceedings would not be recognised automatically by the UK courts without an application being made to that effect.

Financial institutions are excluded from the EU Insolvency Regulation, with two EU Directives (implemented into UK law by the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 and the Insurers (Reorganisation and Winding Up) Regulations 2004) forming a separate European framework for allocating jurisdiction and ensuring recognition of insolvency proceedings. On Brexit, while the provisions of UK law which implement the Directives will continue, financial institutions will need to consider the cross-border rules of the UK and the remaining EU Member States in case there is no longer reciprocal recognition of insolvency proceedings commenced in the institution's home jurisdiction.

Consumer credit and mortgage regulation

Existing EU consumer finance protections and mortgage regulation (under, for example, the Mortgage Credit Directive) are incorporated into UK law by legislation and FCA handbook rules. These provisions will continue post-Brexit unless and until new legislation amends or repeals them. This creates certainty in the short term although there is potential for divergence from the EU in the medium to long term. There is unlikely to be a significant dilution of protection although certain policy decisions may be impacted. The protection of consumers remains one of the FCA's key objectives.

That said, the White Paper disclosed that the UK Government intends to bring forward a Green Paper, which will closely examine markets that are not working fairly for consumers.

The question of an independent Scotland

The Scottish Government, backed by an SNP-Green majority in the Scottish Parliament, has asked the UK Government to make an order under section 30 of the Scotland Act 1998 (a 'section 30 order'), to allow a further independence referendum to take place between autumn 2018 and spring 2019. The Prime Minister's refusal of that request has been well-publicised, but the response that "now is not the time" suggests a second referendum may be a matter of when rather than if, albeit that the UK Government's rationale is that both Brexit and the future UK-EU relationship must have bedded in before the Scottish electorate would be able to make an informed choice.

There is at present no clarity over what the Scottish Government's proposals would be for an independent Scotland's relationship with the EU – both full membership and EEA membership have been mooted. Other key questions such as currency and regulation would also have to be addressed, with it being likely that the prospectus would have to be significantly different from that put forward in the 2014 referendum.

Irrespective of political view point, the ongoing debate on Scottish independence adds an additional layer of complexity to the current market environment, as well as its wider economic implications, opportunities and risks. There are certain elements of contracts that can be future-proofed at this stage to ensure the position of the parties is preserved or risks mitigated irrespective of any potential referendum outcome.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Clyde & Co
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions