The European Union (Withdrawal Agreement) Bill is currently progressing through the UK parliament ahead of an anticipated Brexit date of 31 January 2020 – but that does not mark the end of Brexit and there are still a number of unknowns.
We do not yet know what the UK financial services regulatory landscape will look like in January 2021 (at the end of any implementation or transition period). Although the UK and EU have taken steps to avoid market disruption in case of the 'cliff edge' scenario of a no-deal exit, the outstanding equivalence issues are major problems that ultimately depend on politics.
Regardless of the eventual form of the UK's departure from the EU, UK and EEA financial firms will have to take some action ahead of 31 January 2020. For some EEA firms, this includes registering for the Financial Conduct Authority (FCA) Temporary Permissions Regime in order to ensure that they can continue to benefit from the passporting regime in a no-deal Brexit scenario.
If the withdrawal agreement is concluded
If the Withdrawal Agreement Bill completes its passage through the UK parliament, and the withdrawal agreement itself is concluded by both the UK and the EU before 31 January 2020, the UK will then enter a Brexit implementation period ending on 31 December 2020. During this period, it would then seek to negotiate a new trade deal with the EU.
Although the UK and EU have taken steps to avoid market disruption in case of the 'cliff edge' scenario of a no-deal exit, the outstanding equivalence issues are major problems that ultimately depend on politics.
During the implementation period, EU law - including financial services 'passporting' under MiFID, the AIFMD and UCITS - would continue to apply in the UK. The UK would also implement any new EU laws which take effect before the end of the implementation period. Notably, this includes new prudential requirements for investment firms: the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR).
The withdrawal agreement as drafted allows the implementation period to be extended once by agreement between the UK and EU, to either 31 December 2021 or 2022. Ursula von der Leyen, the new president of the European Commission, has warned that it would be "impossible" to negotiate a comprehensive trade deal by the end of 2020, although UK prime minister Boris Johnson has said that it is "enormously likely" that a trade deal will be agreed within this time scale.
If a trade deal is agreed by the end of the implementation period, the UK would still face the challenge of implementing it in time for 1 January 2021 (or a later negotiated deadline).
If no withdrawal agreement is concluded
If no withdrawal agreement between the UK and EU is concluded before 31 January 2020, the UK will leave the EU on that date without a deal, unless the UK and EU agree a further postponement to exit day.
In this scenario, the FCA's Temporary Permissions Regime (TPR) would apply. This would allow EEA firms which were passporting in the UK under certain EU regimes to continue passporting their services into the UK until 31 December 2020, provided that they submitted TPR notifications to the FCA before 30 January 2020. By the end of 2020, the EEA firm will need to have either obtained FCA authorisation to continue carrying out its UK-based activities or wound up its UK business.
However, certain EU regimes would be replaced by UK rules from 1 February 2020 in a no-deal scenario. These include reporting requirements under various EU regimes, such as transaction reporting under the recast Markets in Financial Instruments Directive (MiFID II) and European Market Infrastructure Regulation (EMIR) reporting. As the UK would be a 'third country' from the EU's perspective in this scenario, obligations such as the contractual bail-in requirement in the Bank Recovery and Resolution Directive (BRRD) would also become relevant.
The EU has agreed to certain temporary measures to avoid market disruption in the event of no deal. For example, UK central counterparties (CCPs) would be recognised by the EU for 12 months and would be permitted to use EU clearing houses for three years. However, other issues remain sticking points and their resolution will come down to politics.
One example is that any equivalence granted to the UK in relation to the MiFID II share trading obligation (STO) or derivatives trading obligation (DTO) is a matter for the European Commission. Although the UK's regime will be identical to the EU regime immediately following Brexit, the Commission has to date declined to grant equivalence. The European Securities and Markets Authority (ESMA) has made clear that the STO regime would apply to shares of EU companies traded on EU trading venues and shares of UK companies that are liquid in the EU in a no-deal Brexit scenario. This means that EU counterparties would not be able to trade those shares in the UK even if the UK is the company's primary listing.
The FCA has said it does not expect firms to prepare now for January 2021, and there continues to be a great deal of uncertainty. However, firms should keep abreast of developments and bear in mind that a no-deal Brexit remains a possibility.
It is also worth noting that if the UK and EU fail to negotiate any new trade deal by the end of the implementation period, EU law would cease to apply overnight.
Alice Bell is a financial regulation expert at Pinsent Masons, the law firm behind Out-Law.