Diederik Zandstra, Senior Policy Director, Brexit, UK Finance
Unravelling the deeply integrated legal and economic relationship between the UK and the EU after 40 years was always going to be challenging. In the past week the UK and EU completed the third of five negotiating sessions on the first phase of the UK exit from the EU and this week MPs debated the Withdrawal Bill in Parliament for the first time. Large sticking points remain and the two year clock is ticking.
Both events confirmed what we already knew. Proving certainty and stability for business and customers in this uncertain environment is critical to ensure that they can operationally and commercially prepare in time for the March 2019 exit. An interim or transitional period is needed with comprehensive and temporary measures to ensure that businesses and customers are not faced with a ‘cliff edge’ moment at the point of exit when existing rights and obligations disappear overnight. This could cause economic havoc and lead to a chilling in economic activity in both the UK and the EU.
Providing certainty to the large number of cross-border financial services contracts will need to be part of these interim measures. It is estimated that €1.3 trillion of UK-based bank assets are related to the cross-border provision of financial products and services to governments, businesses and individuals. The passport regime that has enabled customers to access these cross-border products and services from UK-based banks will cease to apply on exit. With it comes significant uncertainty as to the continuity of these cross-border financial contracts which support funding and investment for growth.
In the absence of a blanket solution each contract will need to be individually assessed to determine if elements to be performed constitute a regulated activity no longer authorised under the passporting regime and whether the national laws of the Member State where the customer is located nonetheless permit the activity. This uncertainty and the potential need to transfer or restructure contracts could have a significant impact on customers. Prompt action is required to provide the necessary clarity that these contracts will continue after the UK exit from the EU.
Uncertainty of this sort relating to the treatment of an existing contract during a period of transition between two legal regimes is not without precedent. An EU-wide solution was adopted to address uncertainty around the introduction of the euro currency and around the new regulations on OTC derivatives, central counterparties and trade repositories.
UK Finance and AFME have today published a joint paper Impact of Brexit on cross-border financial services contracts. The paper examines the UK and EU market place for cross-border provision of financial services and the potential impact on the existing stock of cross-border contracts. The paper identifies key issues around contractual uncertainty resulting from the UK’s exit from the EU in March 2019 and suggests potential ways of addressing these.