On 23 August 2018, the Secretary of State for Exiting the EU, Dominic Raab MP, gave a speech on planning for a ‘no deal’ Brexit. The speech was followed by the UK Government issuing over 20 sector specific guidance notices on how businesses and individuals should prepare for a ‘no deal’ Brexit plus an overview paper.
Mr Raab stated in his speech that “good progress on the outstanding issues” that need to be resolved on the Withdrawal Agreement had been made but as 29 March 2019 draws closer preparations for a ‘no deal’ Brexit would have to be accelerated. The acceleration of preparations would be consistent with the statement issued by the UK Government after the Cabinet away day at Chequers earlier this year which stated:
“It remains our firm view that it is in the best interests of both sides to reach agreement on a good and sustainable future relationship. But we also concluded that it was responsible to continue preparations for a range of potential outcomes, including the possibility of ‘no deal’. Given the short period remaining before the necessary conclusion of negotiations this autumn, we agreed preparations should be stepped up.”
In addition to accelerating no deal preparations, Mr Raab said that it has now been agreed with the EU that there will be “continuous negotiations”, in order to “energise the final phase of the diplomacy and to reach a deal that is in both sides’ interests”. The UK Government already has more than 7,000 people working on Brexit and there is funding for an extra 9,000 staff to be recruited into the civil service, enabling the UK Government to accelerate its preparations as and when it needs to.
Mr Raab concluded by saying that his message was a pragmatic one – take note of the practical information the UK Government is providing, stay engaged with the UK Government on the detail and review any contingency planning.
The overview paper
The UK Government’s overview paper summarises the measures dealing with a ‘no deal’ scenario. It also states that the guidance notices “set out information to allow businesses and citizens to understand what they would need to do in a ‘no deal’ scenario, so that they can make informed plans and preparations”.
The overview paper explains that in some of the guidance notices, the UK Government demonstrates where it is prepared to act unilaterally to provide continuity for a temporary period in a ‘no deal’ scenario in order to minimise disruption to UK citizens and businesses – irrespective of whether the EU reciprocates. In terms of the financial services framework, the overview paper refers to the temporary permissions regime (see our earlier blog) which will allow firms and funds passporting into the UK to continue providing services in the UK for a temporary period after Brexit.
The overview paper also covers the EU’s approach. The European Commission has already published a significant number of Brexit preparedness notices (here). The overview paper comments that in a ‘no deal’ scenario the Commission has “indicated that they would intend to treat the UK as a third country for all purposes”. It adds that, the “EU has suggested they would apply regulation and tariffs at borders with the UK as a third country, including checks and controls for customs”. The guidance notices therefore set out for businesses how they will need to prepare for customs checks which would be applied if they currently only trade with the EU.
The overview paper states that clarity on what action the EU may consider taking to maintain stability for a temporary period “would provide reassurance to EU and UK businesses and citizens alike”.
Guidance notice – financial services
The guidance notice on banking, insurance and other financial services if there’s no Brexit deal covers much of what we already know. In summary, the key points include:
- In a ‘no deal’ scenario, UK firms’ position in relation to the EU would be determined by the relevant Member State rules and any applicable EU rules that apply to third countries at that time.
- The UK will, in general, default to treating EEA Member States and EEA firms largely as it does other third countries and their firms. There will be instances where the UK Government will diverge from this approach in order to maintain UK financial stability, for example the introduction of the temporary permissions regime.
- Similar temporary permissions regimes will be provided for EEA electronic money and payment institutions, registered account information service providers and EEA funds that are marketed into the UK.
- In a similar vein, whilst the UK Government has already set out draft legislation that will establish a temporary permissions regime for central counterparties (CCPs), it will further deliver legislation for transitional arrangements for: central securities depositories, credit rating agencies, trade repositories, data reporting service providers, systems under the Settlement Finality Directive and depositories of authorised funds.
- The UK Government will bring forward legislation, if necessary, to ensure that contractual obligations between EEA firms and UK-based customers that are not covered by the temporary permissions regimes can continue to be met.
- If customers of financial services firms need to take action, then firms should communicate this to them at an appropriate time:
- for UK-based customers accessing services in the UK provided entirely by UK-based providers, there is unlikely to be any change as a result of Brexit. However, if UK customers are affected by a firm’s Brexit planning, then the firm should communicate this to them;
- some EEA firms provide deposit taking and retail banking services in the UK via a UK authorised subsidiary. There will be no change to the UK authorisation as a result of Brexit, and services can continue to be provided;
- the UK Government is looking to align UK domestic payments legislation to maximise the likelihood of remaining a member of the Single Euro Payments Area as a third country;
- the cost of card payments between the UK and the EU will likely increase, and these cross-border payments will no longer be covered by the surcharging ban;
- for UK-based customers who access banking, insurance, investment funds and other financial services with EEA firms currently passporting into the UK, the temporary permissions regimes will allow such firms to continue providing services to UK customers for up to three years after Brexit; and
- in the absence of action from the EU, EEA-based customers of UK firms currently passporting into the EEA (including UK citizens living in the EEA), may lose the ability to access existing lending and deposit services, and insurance contracts due to UK firms losing their passporting rights. The UK Government gives the example that in the absence of EU action, EEA clients will no longer be able to use the services of UK-based investment banks, and UK-based investment banks may be unable to service existing cross-border contracts. However, the UK Government adds that it is committed to taking unilateral action to resolve issues as far as possible and is committed, for example, to continue to treat prospectuses that are valid in the UK before Brexit as valid for the remainder of the 12 months from their date of approval, including where that includes a period after Brexit.
- In relation to funds and managers authorised under EU legislation, the UK Government notes that there are requirements for cooperation between supervisory authorities in the relevant EU Member State and the non-EU country concerned. The UK Government states that it is “ready to agree cooperation arrangements with their EU counterparts as soon as is possible, which is a technical exercise to bring the UK into line with other third countries”. It also adds that unless “the EU confirms it does not intend to put such arrangements in place, asset management firms can continue to plan on the basis that the delegation model will continue”.
- In relation to financial market infrastructure (FMI) there are a number of messages:
- there will be no need for UK-based clearing members using UK CCPs to take any action as a result of Brexit;
- for UK-based users of non-UK CCPs the UK Government is providing for a temporary permissions regime that will enable non-UK CCPs to continue to provide services to the UK for a period of up to three years;
- for customers settling UK securities at the UK’s Central Securities Depository (CSD) there will be no change as a result of Brexit. If no action is taken by the EU and EU Member States, EU securities may no longer be able to be directly settled in the UK;
- for UK customers of non-UK CSDs, the UK Government is bringing forward transitional provisions allowing such CSDs to continue providing services to the UK until equivalence and recognition decisions are made. Further details will be provided in September 2018;
- for FMIs designated at the time of Brexit under the UK Settlement Finality Regulations (SFR), their designation in respect to UK insolvency will carry on;
- the UK Government will bring forward legislation to continue protections granted by the SFR allowing designations of FMIs that are outside the UK. This legislation will also provide for a temporary regime that will allow certain non-UK FMIs to continue to benefit from UK protections currently provided by the EU Settlement Finality Directive; and
- without action to designate UK FMIs, EU settlement finality protection for UK FMIs will cease. This will mean that EU customers will present higher risks to these FMIs and may no longer be able to access their services.
The guidance notice on financial services reflects the position we expected: the UK is committed to a pragmatic approach under which EEA providers are offered a broad temporary permission regime in order to allow them to carry on providing services to the UK market. This covers the broadest possible ground for both currently authorised EEA firms operating under the passport and specialist infrastructure such as CCPs. The one exception is on trading venues where there will be a need for EU exchanges to get UK recognition, and there is a possible implication that EEA MTFs may also not have access into the UK market.
Overall, the guidance notice gives an honest assessment of the limits to which the UK can solve the problems alone by recognising that in many areas it takes two to tango. For example, EEA customers of UK firms may no longer be able to borrow or trade with them in a worst case scenario.
As always, the devil will be in the detail on all of this.