Issue Impact
If the UK is to leave the EU and the single market, how will UK/EEA cross-border business be regulated and what is the timetable? Political uncertainty remains and nothing is yet agreed. The EU/UK negotiations are only now turning to the framework for the new treaty on trade. The current negotiations envisage a Withdrawal Agreement, which would maintain the single market cross-border regime until 31 December 2020. At that point, the extensive single market mutual recognition/DRC arrangements between the UK and the rest of the EU/EEA (such as passporting) would fall away. It seems that any new DRC/mutual recognition will be more limited in scope and scale and on a different legal basis. There is no consensus, however, on any such measures; indeed the EU has not so far agreed to go beyond the limited mutual recognition/DRC under its existing third country equivalence provisions.
UK authorisation ceases to be valid in rest of EU/EEA and authorisation in EU/EEA states ceases to be valid in the UK. Loss of single market mutual recognition would include the end of passporting for firms and funds and bring to an end many other DRC arrangements for cross border business. This would impact both EU/EEA business with the UK and UK business with the EU/EEA. Groups are now working on more detailed planning and implementation for the regulatory restructuring of cross-border business including (i) establishing and applying for authorisation for new EU/UK entities, (ii) switching cross-border business to subsidiaries on the other side of the UK/EU border, (iii) obtaining local authorisation for foreign branches (when this is possible) (iv) restructuring services business which will become prohibited under local perimeter rules. Longer lead-time items include new licences. Re-documentation, e.g. of client and other relationships, comes later.
Critical issues for the structuring of cross-border business in the absence of single market DRC/mutual recognition New structures may depend on the extent to which groups can rely on techniques such as fronting, reverse solicitation, intra-group outsourcing/ support and transaction booking, and the differing local member state perimeter regimes. Regulators have been publishing guidance on various issues relevant to Brexit restructuring including ESA guidance on the restrictions and limitations that will apply.
Without single market DRC, some current modes of supply for UK/EEA cross border business will be prohibited Some modes of supply cannot be continued, even by obtaining local authorisation. Services business may be prohibited and require local delivery/establishment; other business (such as retail deposit taking) may require a local subsidiary because use of a local branch may be prohibited.
New freedom for the UK to adapt or revoke inappropriate EU regulatory requirements Brexit (without EEA membership) would remove the legal obligation for the UK to implement EU FS regulation. After the end of any transitional period, the UK may be free to depart from existing/future EU regulation. Firms may wish to lobby for changes where current EU derived requirements are burdensome, sub-optimum for the UK market or lack domestic support from regulators. Various bodies including parliamentary committees have already been looking at this topic. The UK’s freedom may well be restricted, however, by the terms of any mutual recognition/DRC under a new trade deal with the EU, and the desire to achieve ‘equivalence’ recognition under third country provisions in EU FS legislation.
Transactions and other contracts The Brexit changes to the current legal regime will impact the terms and effect of contracts and transactions. There will be broadly based review of standard documentation – both precedents and industry standards such as ISDAs. Firms and lawyers will need to be alert when dealing with contracts and transactions whilst uncertainty persists. Regulators are now alive to these issues - for example in relation to longer-term contracts and transactions such as derivatives and insurance policies - and have been pressing for legal measures.
Loss of UK’s leading role in formation of regulatory policy in EU The UK has been highly influential in the development of the EU rules for financial institutions. Its role is diminishing and the UK will probably cease to have any real policy involvement following Brexit. Lobbying in relation to EU rules will have to be routed via EU/EEA firms/bodies and will no longer take account of UK specific issues.
Increased risk of EU rules attacking the City/UK The City has faced various challenges from EU proposals. The UK has sought to rely upon its rights as an EU state (e.g. under the EU treaties) and has obtained further protection under the new UK/EU settlement. After Brexit the EU will be free to promote the interests of EU states/financial centres free from UK challenge under these protections.


What action can you take now? How can CMS help?
Financial institutions undertook extensive Brexit contingency planning in 2017 for a worst-case EU exit in March 2019 without any cross-border mutual recognition/DRC thereafter. Regulators were involved in this process. Generally speaking these plans remain valid although, hopefully, the probability of the impact date being delayed by a 21-month transitional period will continue to improve. From 2018 onwards the emphasis is on (i) more detailed planning for the impact date and the loss of single market cross-border DRC and (ii) more advanced preparations/ implementation, particularly for longer lead time structural changes. CMS has been advising FIs on Brexit contingency planning and implementation since before the referendum. We can continue to assist as firms move from outline contingency planning to more detailed assessments and preparations and more advanced implementation. We can provide regular briefings on the state of the negotiations and on treaty texts as these start to emerge and provide expert analysis of the expected outcomes in the FS sector. The description below is from 2017 but remains valid as a high-level overview.

Brexit planning – group/regulatory structure.


Map EU/EEA business/operations. Identify other areas impacted by Brexit – e.g. cross-border outsourcing/services. Consider options for post-Brexit structure/reorganisation. Identify/plan for/investigate key issues (e.g. authorisation, capital, employment, intra-group/shared services and tax) to evaluate optimum structure and necessary reorganisation to implement.

Review and advice on optimum structures and reorganisation mechanics.


Pan-European advice from CMS offices across the EU, which have close contact with local regulators. Coordinated pan-European legal advice.


Review planning assumptions and conclusions.


Review mapping of current structures.


Advice on any of the key legal issues mentioned.

Assessing the ability to use intra-group techniques such as fronting, outsourcing and transaction booking for post single market structures. CMS advises on all these issues and can provide pan-European advice covering both UK and EEA regulation and the differing domestic requirements of continental jurisdictions.
Assessing the ability to provide cross border services outside the single market. Some services business will be prohibited. CMS has a long track record in providing complex pan-European regulatory solutions. It has conducted many projects looking at the differing member state perimeter rules (for non-EU firms).

Brexit planning – internal briefing.


Ensure necessary briefing internally on Brexit and raise awareness of above issues/impacts – from Board level to business support/operations and business units.

Provide in-house Brexit training/presentation.


Lead in-house Brexit brainstorming.


Review in-house briefing.

Brexit planning – legal.


See above. General counsel to develop Brexit planning with greater detail and more advanced planning/implementation, where required, with eye to progress of Withdrawal Agreement.

Review plans and assumptions.


Brainstorm impact/issues.


Advise on relevant legal issues.

Contracts and transactions.


Review contracts, including ongoing negotiations and transactions. Assess Brexit impact on contract/deal terms.

Advise on contractual issues – Brexit impact.


Review internal policy on Brexit impacts re contract terms.


Longer-term contracts – including derivatives and insurance policies – ensure the issues have been fully reviewed and industry best practice on contingency planning followed. Advice on any unilateral or bilateral measures to address these issues.

FS