Brexit: Impact on financial markets

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Following the UK's vote to leave the European Union, we consider the potential implications for the UK's financial markets.

Key issue 

Financial services businesses incorporated in the UK or which have a branch in the UK are permitted to carry on their business throughout the EU without additional local regulation under the various "passports" which apply. The key issue is how much the post-Brexit regime will differ from the existing passporting regime. 

Potential impact 

Now that the EU exit process has been triggered and following the UK Prime Minister’s Florence speech firms should operate on the working assumption that there is a significant risk that passport rights will not continue to exist post-Brexit and that any transitional period is likely to last only around two years.

A financial services business based in the UK that would be materially impacted by the loss of passporting needs to have already begun its contingency planning. Since the Article 50 timetable has no transitional period, unless (a) an agreement can be reached before the Article 50 notice is given or else (b) an agreement can be reached by the time the Article 50 notice is given that there will be a transitional period after the Brexit agreement is reached before it comes into effect, businesses likely to be affected may need not merely to make contingency plans but also, to some extent, to implement them. Find out more here.

The loss of passporting rights is equally important for an EU business passporting into the UK. Such a business equally needs to consider what the impact might be for the business if it can no longer rely on passport rights. In particular the PRA has indicated that it is likely that where it is considering whether a branch of an EU credit institution needs to become a UK subsidiary it is likely to apply the same rules as those it currently applies to non-EU credit institutions operating in the UK. 

Further considerations 

The primary question is to judge the degree to which financial services businesses based in the UK would be materially impacted by the loss of passporting and would need to relocate some of their operations into the Eurozone. This will vary from business to business. 

Actions 

UK-based financial services businesses should now be doing the following: 

  • Assess how much of their business done in or from the UK relies on the existing passport regimes. 
  • If there is any significant reliance on passporting, to what extent could that business be done from another subsidiary in one of the other 27 countries which already has the appropriate regulatory approvals? 
  • Would a new operation need to be established in one of the other 27 countries and to seek and obtain authorisation? What would the implications be in terms of headcount? What are the lead times for having discussions with the local regulator, obtaining floorspace and relocating or hiring necessary staff? To what extent could operations be delegated back to the UK? 
For a more detailed analysis of the issues, please contact the authors or your usual DLA Piper contact.