The Brexit agreement reached between the EU and the UK on Christmas Eve, as expected, for the most part, neglected Financial Services and their activities across the EU/UK border.
Large parts of the new EU/UK co-operation frameworks addressing Financial Services have not been decided upon and even their outlines remain unknown until they are revisited, reportedly still slated for Q1 of 2021.
What was in the agreement, however, was a commitment to the creation of a framework for regulatory services before March 2021. From the details, this likely will be similar to that in the World Trade Organisation’s (“WTO”) General Agreement on Trade in Services (“GATS”).
As anticipated, the agreement does not provide anything similar to the passporting rights enjoyed by the financial services businesses in the EU or even for a memorandum of understanding between the EU and the UK which could serve as a sign of the potential willingness of the EU to give the UK access to its market. However, there is a declaration that such a memorandum will be reached in Q1 of 2021. We hope that the memorandum will shine some light on pending equivalence decisions which will address whether the EU and UK’s regulatory regimes achieve similar results and therefore may be considered adequate.
What is certainly helpful is that the agreement does not put any limitations on the portfolio management delegation from the EU to the UK; it allows visa/permit free business travel and introduces a six month grace period for international data transfers.
Following from the above, UK MiFID firms wishing to do business with EU clients need to seek alternative routes to the EU market, as currently the situation is as unclear as it was before 24 December 2020. Below we list the routes to EU access that we have explored in our preparation for the post-Brexit UK/EU border.
- Authorisation in a Member State is the most robust but expensive arrangement which may not be well suited to businesses without a well-established client base in Europe.
- The secondment or tied agent models enable UK MiFID investment firms to contract with an EU authorised MiFID firm to provide financial services under its regulatory umbrella. Substance and other conditions vary from country to country; however, this model may be interesting for firms in the process of obtaining their own authorisation or entering the EU market for the first time.
Once the memorandum of understanding is reached by the UK and the EU or the UK and Ireland, there may also be a possibility to rely on a MIFID Safe Harbour exemption specific to Ireland. This would mean that investment services can be provided on a cross-border basis without triggering a licence requirement by either:o A non-European Economic Area (EEA) entity; oro An unregulated EEA entity.
A third-country investment firm can only rely on the MiFID Safe Harbour if the following conditions are met:o The firm is subject to authorisation and supervision in the third country where the third-country firm is established, and the third-country firm is authorised so that the competent authority of the third-country pays due regard to any recommendations of the Financial Action Task Force (“FATF”) in the context of anti-money laundering and counter-terrorist financing.o Co-operation arrangements that include provisions regulating the exchange of information for preserving the integrity of the market and protecting investors are in place between the Central Bank of Ireland (“CBI”) and the competent authorities where the third-country firm is established. - The CSSF Regulation 20-09 of 14 December 2020 added the United Kingdom to the Luxembourg national equivalence regime which states that in the absence of an equivalence decision under article 47(1) of Regulation (EU) No 600/2014 (“MIFiR”), a third-country firm, subject to conditions outlined in Circular CSSF 19/716 (as amended by Circular CSSF 20/743), can provide investment services, investment activities or ancillary services in Luxembourg to per se eligible counterparties and professional clients without setting up a branch in Luxembourg. To benefit from the third country regime, UK investment firms must submit an application file to the CSSF following the procedure provided in CSSF Circular 19/716.
- Finally, it should also be noted that there may be further exemptions in local laws allowing third-country firms to enter certain jurisdictions. One of them, although still being tested in practice, is a relatively new provision in section 2 of the German Banking Act. In addition to the above, some of the temporary permissions regimes still remain available to firms.
