On 5 December 2018, the Loan Market Association (LMA) published a paper on the consequences of a no deal Brexit scenario on the European loan market (the Paper). The Paper emphasises a number of regulatory issues which may arise in a no deal scenario, particularly due to:
- the wide usage of wholesale loan products across the EU27;
- the cross-border nature of lending;
- the differences in loan market regulatory requirements between individual EU Member States; and
- the heavy reliance of borrowers on the loan product for their day to day business needs.
Key points to note from the Paper are that:
- any loss by UK lenders of EU passporting rights – which include lending, as well as other forms of financing (including guarantees) – will have a major impact not only on loan market activities conducted by institutions located in the UK, but also on borrowers benefiting from UK-sourced liquidity across the EU27;
- there exists additional EU regulation which could have a wider impact on the decision to lend or the lending process more broadly – including the treatment of “exposures” under the Capital Requirements Regulation. The impact of these broader regulatory measures is such that, even if lending itself is permitted in a particular jurisdiction, other contributing factors could lead to such lending not being practical, cost effective or otherwise possible. Given the volume of lending which emanates from the UK to borrowers located in the EU27, this would result in a diminished pool of available liquidity; and
- the LMA believes that it is vital that transitional arrangements are put in place, so that borrowers are adequately protected irrespective of the manner of exit of the UK from the EU – which is especially pertinent given that there is no “equivalence regime” for cross-border lending or credit services or associated activities. However, these are all services that are currently widely used and relied upon across the EU.
The LMA notes a number of potential solutions to the issues which are identified within the paper, to remedy the risks to the loan industry.