The German Federal Ministry of Finance (BMF) has published a draft bill which, inter alia, sets out a national transition regime for UK credit institutions, investment firms and insurance undertakings in case of a hard Brexit. The provisions regarding market access of UK institutions introduced by the draft bill will only apply should the EU and the UK not enter into a Withdrawal Agreement.

The draft bill aims at avoiding market distortions and risks to financial stability in such scenario. For that purpose, the German regulator (BaFin) is empowered to allow regulated UK institutions that have operated in Germany under the European passport regime so far to continue to provide certain services for up to 21 months following a hard Brexit without a German license (i.e., until the end of 2020 at the latest).

• With respect to UK credit institutions that conduct banking business in Germany through a branch or on a cross-border basis under the European passport regime on 29 March 2019, BaFin may determine that the passport regime continues to apply accordingly, fully or partially, for a period of up to 21 months following the time of withdrawal. However, new financial transactions concluded after 29 March 2019 will only be allowed to the extent they are closely connected with transactions existing at the time of withdrawal.
• With respect to UK investment firms providing financial services in Germany through a branch or on a cross-border basis at the exit date, the same rules as for credit institutions will apply.
• With respect to insurance undertakings, BaFin may determine that the respective passport regime continues to apply to UK insurers and reinsurers operating in Germany under a passport on 29 March 2019. However, this transitional regime will only cover the winding-up of insurance contracts that were concluded before the time of withdrawal.

The draft bill grants BaFin flexibility regarding its orders. BaFin may decide about the length of the transition period at its discretion and may further limit its transitional orders to certain types of transactions. BaFin also has the general power to impose conditions and shall pay particular attention to deposit and investor protection schemes.

Pursuant to the official explanatory statement of the draft bill, the BMF expects the UK institutions to either terminate the relevant business relationships, obtain a German license (by establishing a dependent German branch) or transfer the respective business to a licensed provider before the end of the national transition period. In this regard, it is worth noting that the reasoning of the BMF does not mention the possibility to provide regulated services without a German license at the request of the client (so called reverse solicitation). So far, the German regulator has generally recognized an exception from the national licensing requirements with respect to services of a third-country provider at the exclusive initiative of a German client. BaFin has explicitly stated that such exception also covers maintaining an existing relationship. The current reasoning of the BMF appears to put into question such exception with respect to services provided under an existing relationship. Given that the document is an initial draft at this stage, it remains to be seen whether the explanatory statement will be amended in the course of the legislative procedure.

Technically, the draft bill is a supplement to an existing bill on tax issues in connection with Brexit. Taking into account the required legislative procedure, it will presumably only enter into force in 2019.