Brexit update for financial services firms - week ending 3 August 2018

United Kingdom

The week in outline:

This has been a quiet week. Michel Barnier made a further statement about the UK’s White Paper proposals for the future EU/UK relationship.

On 10 July 2018, two days before the publication of the White Paper, Barnier delivered a speech at the European American Chamber of Commerce in which he discussed the UK’s original proposal for a bespoke system of bilateral mutual recognition in financial services He said: "but the UK still wants continuity. It would want the EU to accept UK standards by means of a system of mutual recognition.

The UK needs to understand that the EU cannot accept such mutual market access without all the safeguards that underpin it.

This would go against all our objectives:

  • First, ensuring financial stability,
  • Second, protecting investors,
  • Third, securing market integrity
  • And fourth, maintaining a level playing field.

These objectives would not be reached if financial institutions could passport in the EU and serve clients based on a licence by the supervisors of a third country.”

On 12 July the UK published its White Paper which effectively withdrew the bilateral mutual recognition proposal and advocated a system of ‘enhanced equivalence’ as described in our report from the week ending 13 July 2018.

Barnier subsequently gave evidence to the House of Lords EU Select Committee where he argued that the EU equivalence regime should be used for services: “These are unilateral tools and instruments that we use with third countries in certain specific areas where we take unilateral measures—in both ways—in co-operation, such as financial services and data protection. Financial services are a big industrial and economic sector for your country. We will be able to use the system of equivalences that we have already used.”

On 20 July Barnier commented directly on the White Paper, and questioned whether it would be possible to have access to the single market of goods but not services: “Concerning the future economic partnership, the White Paper raises three series of questions on which we expect answers: […] Third question: are the UK's proposals in the economic interest of the European Union? It is also in my mandate to protect the economic interests of the European Union.


By definition, the “common rulebook” for goods would not concern services, where the U.K. would be free to diverge. When we know that 20%-40% of the value of products that we use every day is linked to services, how would we avoid unfair competition which European businesses could be faced with?”

More recently, during the press conference following the latest round of negotiations, Barnier said: “A clear example of what this means concerns our future relationship in financial services.

  • We discussed financial services this week and agreed that future market access will be governed by autonomous decisions on both sides.
  • We recognised the need for this autonomy, not only at the time of granting equivalence decisions, but also at the time of withdrawing such decisions.

And we agreed to have close regulatory cooperation, which will also have to respect the autonomy of both parties.”

As we explained in our previous report, the two contentious aspects of the UK proposal for FS are (i) the suggestion of a bilateral framework for treaty-based commitments and on a more objective equivalence process and (ii) the extension/inclusion of DRC in areas where the EU currently has no third country DRC arrangements e.g. cross-border services provision of wholesale/commercial banking. (Our April 2017 report provides an overview of the current EU third country legislation.) It is perhaps interesting that Barnier limited his comments to the first issue and did not rule out the idea of DRC which goes beyond the current EU third country regimes.

House of Commons Library Briefing Paper: The Status of “retained EU law”

This HoC library briefing explains "retained EU law" as created by the EU (Withdrawal) Act 2018. The report can be accessed here.

“The EUWA notably and specifically excludes from retained EU law:

  • the principle of supremacy of EU law (in relation to future enactments or rule of law);
  • the Charter on Fundamental Rights (except insofar as rights are replicated in instruments of retained EU law anyway); and
  • the “Francovich” state liability principle of EU law (for acts or omissions arising after exit day or not litigated within 2 years of it).”

“The European Union (Withdrawal) Act only preserves the legal effect of EU law on exit day only as a starting point, however. Whether and how this body of law will change in the future is at least as important as what the substance of it is at the point the UK formally leaves the European Union.”

“The Explanatory Notes to the EUWA provide a non-exhaustive list of provisions in the Treaty on the Functioning of the European Union that the Government believes confer directly effective rights falling under section 4 of the Act. This list includes:

  • Article 18(prohibiting discrimination on grounds of nationality);
  • Article 20(though not20(2)(c)) (citizenship rights);
  • Article 21(1)(rights of movement and residence deriving from EU citizenship);
  • Articles 28 and 30(concerning the EU’s customs arrangements);
  • Articles 34-36(concerning non-tariff barriers);
  • Article 37 (1-2)(prohibiting discrimination on access to goods);
  • Article 45(1-3) (free movement of workers);
  • Article 49(freedom of establishment);
  • Article 56-57(freedom to provide services);
  • Article 63(free movement of capital);
  • Article 101(1)and102(competition law);
  • Article 106(1-2)(pubic undertakings); and
  • Article 107(1)(state aid).”

“Many of the rights are currently directly effective in these Treaty provisions are likely to be repealed by subsequent domestic legislation to the extent that they are inconsistent with post-exit arrangements. For example, the Trade Bill and Taxation (Cross-border Trade) Bill will, by necessary implication, repeal some or all of the directly effective rights that would otherwise be retained by section 4. This would be necessary to give domestic effect to the Government’s stated policy preference of leaving the Single Market and Customs Union.”

“Nevertheless, the default retention of these directly effective rights and obligations (and those in other EU instruments like directives) currently exercised under the ECA matters: it ensures that the “starting point” for UK law on exit day is presumptively closer to the current set of arrangements than would be the case if only certain EU instruments were preserved.”

“Interpretation and application of EU law currently relies both on the judgments of the CJEU and domestic courts, with the latter being bound to follow the former. Typically, the CJEU determines points of EU law; then domestic courts are left to apply that law to the specific facts of the case raised before them. Insofar as domestic courts can no longer refer a question of EU law to the CJEU, they will therefore have to decide questions of interpretation and application of retained EU law for themselves. How they should do this, and to what extent they should follow or take into account CJEU jurisprudence on the same point of law, depends (according to the EUWA) on whether the CJEU judgment came before or after exit day.”

“In practice, this means that the UK courts are likely to follow pre-exit CJEU judgments except, and to the extent that, Parliament or the Government modifies retained EU law in certain ways. The Act itself refers to the need for case law to be “consistent with the intention” of modifications to continue to be applicable to the circumstances in respect of which it sets a precedent. The responsibility for assessing the “intention” of those modifications, however, will ultimately be a domestic legal question for the UK Supreme Court (or in limited cases, Scotland’s High Court of Justiciary) to discern.”

“In practice, therefore, it may be the case that the UK courts and tribunals continue to follow CJEU jurisprudence as it develops after exit day, to the extent that retained EU law does not consciously diverge from EU law itself. After all, the UK courts already take into account as persuasive authority the jurisprudence of other (especially common law) countries, to the extent that questions of legal principle or substance are sufficiently analogous. It is impossible to say with any significant level of confidence to what extent post-exit CJEU case law would be followed by UK courts and tribunals. There are too many unknowns (as to the extent to which retained EU law will diverge from EU law in the years following exit) to assess this at the time of writing. It will depend both on whether there is a withdrawal agreement and (if there is one) what future relationship is agreed between the UK and EU to take effect after any transition or implementation period.”

Commentary: This is a similar approach that can already be observed in Switzerland, where CJEU judgments after the date of signature of the relevant Swiss treaty are generally non-binding yet highly persuasive in Swiss courts. Given that the UK courts need to distinguish whether Parliament has modified the law to the extent that it no longer reflects EU law this can lead to legal uncertainty, including in the area of FS.

ISDA/AFME: Contractual Continuity in OTC Derivatives: Challenges with Transfers

This paper considers issues of contractual continuity in OTC derivatives post-Brexit. The paper can be accessed here.

“The contractual continuity issue arises because, after Brexit, UK and EU-27 regulated firms will no longer benefit from the single market passport which currently allows them to engage in regulated activities in the EU-27 and the UK respectively without the need for an additional local licence. This raises issues for certain longer-dated OTC derivative contracts, which were entered before Brexit, when the entity held the relevant passport, but where the contract continues beyond Brexit. In such cases, some so-called ‘lifecycle events’ that arise during the life of the contract may be regarded as constituting regulated activities in the jurisdiction where the client or counterparty is located, thus triggering the application of local licensing requirements if the firm retains those contracts after Brexit.”

“ISDA has previously commissioned legal analysis of the likely post-Brexit regulatory treatment of certain events during the life of a transaction, which may involve more than the mere performance of existing contractual obligations. The analysis covers legacy cross-border derivatives contracts in six jurisdictions – France, Germany, Italy, The Netherlands, Spain and the UK.”

“Whilst there are variances amongst the jurisdictions, the key message is that some common lifecycle events may constitute regulated activities in EU-27 jurisdictions triggering local licensing requirements.”

“Therefore, many UK firms that decide that they need to transfer legacy OTC derivative contracts to their EU-27 affiliates before Brexit will need to seek the individual consent of the relevant clients and counterparties to the transfer of the UK firm's rights and obligations to its affiliate (the mechanism known as 'novation'). However, this is not a 'silver bullet' and there are significant execution and timing challenges to a large-scale novation of OTC derivative contracts in favour of an entity in a different Member State.”

Other publications from the RegZone Brexit news feed

EC: An ambitious partnership with the UK after Brexit

This statement from Michel Barnier has been published, which concludes "we should cooperate to fight crime, money laundering and terrorist financing … if we quickly find solutions to the outstanding withdrawal issues, including the backstop for Ireland and Northern Ireland, I am sure we can build a future partnership between the EU and the United Kingdom that is unprecedented in scope and depth". The statement can be accessed here.

ECB: Relocating to the euro area

ECB has published an update of its Q&A. It can be accessed here.

ECB: Supervisory expectations on booking models

This ECB presentation sets out ECB's views on “empty shells” and booking models. Supervisory expectations in section 4 will be used by ECB for the assessment of Brexit cases and for carrying out ongoing supervision of existing banking groups that undertake capital markets operations. The presentation can be accessed here.

FMLC: Level 2 EU legislation

FMLC has published its letters to the EC and to MoJ raising concerns over the status of Level 2 EU legislation in the event the relevant Level 1 act is repealed. The letters can be accessed here and here

CMS RegZone publishes weekly updates (available via email, on-line and via Twitter) on Brexit developments for financial services firms. These provide analysis and commentary on significant developments during the week in question. A daily digest of Brexit news (without analysis or commentary) is also available by email here and online via the RZ news wizard here (both of these can be filtered using the Brexit topic). Links to publications are contained in each update; publications released before the updates commenced in April 2018 can be found in a bibliography here. CMS RegZone publication ‘Where we stand’ provides an overview of the current position in a single report; this is updated regularly to take account of the key developments from the weekly updates.