The Consequences of Brexit for Financial Market Law

Whether London will remain the centre for European financial transactions will depend on its access to the Single Market. Under the current circumstances, nobody can predict either what the legal status of the United Kingdom will be after it has left the European Union, or what consequences Brexit will entail for the European financial market. In our new paper “How Does It Feel to Be a Third Country? - The Consequences of Brexit for Financial Market Law”, we analyze the options in financial market law available to British issuers, credit institutions, insurance companies, securities firms, and asset and fund managers in terms of Brexit.

Our analysis is based on the worst-case scenario that the United Kingdom and the European Union will fail to reach an agreement on cross-border financial markets and services. This case is anything but unlikely, considering the short period of time left for negotiations until March 29, 2019 and the complexity of both UK internal politics and European financial markets law; in practical terms, it is also currently the only predictable case. As part of their risk management requirements, financial firms need to assume the worst, draw up contingency plans and prepare their organizations accordingly.

Assuming that the UK will not be able to convince the EU of the merits of a special deal in financial services, the UK will basically be treated as other third countries or non-Member States. British firms will therefore have basically four possibilities to maintain access to their clients in the Single Market. The first is to obtain an ‘equivalence’ assessment for the UK supervisory and regulatory framework, with that of the EU. In our paper, we discuss the legal requirements and the political element involved in the granting of equivalence. We also discuss conditions that firms operating on the basis of equivalence must respect, e.g. with regard to choice-of-law and choice-of-forum agreements with their customers. The second strategy would be to establish a subsidiary in one of the remaining 27 Member States and serve the clients from there. Some British firms are currently toying with the idea of ‘letter-box companies’ that operate in the EU  with very little staff and capital, while most of the management decisions take place back in London. We discuss the attitude of the European supervisors towards this strategy and the requirements they impose. Third, UK firms may also seek bilateral access by establishing a branch or providing cross-border services in particular Member States. MiFID II expressly grants national regulators the possibility of defining the conditions for such bilateral access. We elucidate the different ways in which they have used this power, using the example of Germany. Finally,  British firms may also want to resort to ‘reverse solicitation’. Treaty law and MiFID II/MiFIR guarantee customers the freedom to obtain services passively from third-country providers. In our paper, we debate how this freedom can be used by British firms to continue serving European clients, and where EU law sets limits.

The preferred option will depend on respective types of businesses and groups of customers. In our paper, we distinguish between these different types of market access and business models, and consider which type of access is most suited to each business model. We argue that under either of these options, British companies will have to comply with certain European laws if they want to maintain access to clients on the continent. Moreover, future autonomous British law making will not be free from coordination with the EU in order to ensure market access.

Our conclusion is that Brexit will not impact all business models to the same extent. Depending on the services offered, the clients served and the countries targeted, fundamental changes to business models are to be expected in some sectors of the industry, such as a relocation of the European hub from London to the continent. This seems in particular likely in the banking and primary insurance markets, where equivalence is not an option. In other parts of the industry, services may continue to be provided from London to the continent with few additional barriers even post-Brexit.

Matthias Lehmann is Professor of Law and Director of the Institute for International Private and Comparative Law at the University of Bonn.

Dirk Zetzsche is Professor of Law at the University of Luxembourg