Brexit: Issues For Financial Businesses

Today, it was announced that the UK public has voted to leave the European Union. There will now be a negotiation of a new relationship between the UK and Europe. The fact of the vote itself has no legal effect on the laws of the UK or EU. The UK will remain a member of the EU until there is either an agreement to exit or expiry of a two-year period after issuance of a formal notice of exit by the UK government. That notice, when served, triggers a negotiation period of up to two years during which time the current EU laws continue to apply in the UK. The UK will lose some of its rights to participate in EU political processes during this period.

This note discusses potential legal models for any post-Brexit negotiated solution in the context of financial business in particular.

Introduction

There are a number of possible models for a new UK deal with the rest of Europe. We discuss these below. It seems unlikely that any of the existing treaty infrastructures underpinning these models will be followed exactly in light of the size and importance of the UK as an economy within Europe and due to some of the policy issues behind the UK's vote. Instead, a unique new arrangement is likely to be negotiated, perhaps containing some elements of the arrangements that other non-EU countries such as Switzerland or Norway currently have in place (which are outlined below).

One key element of any deal from a financial services perspective will be the status of financial services "passports". These currently provide financial institutions incorporated within the EU (including the UK) with access to customers and markets across the EU based on a single home country regulatory authorization. Financial institutions can conduct financial business under the passport out of the UK with customers in European countries subject only to UK supervision under broadly EU-based rules, rather than being dually regulated. One possible post-Brexit scenario is for the UK to remain in the European Economic Area ("EEA"), giving it full EU passporting rights. However, this arrangement gives no vote to UK representatives on EU laws and comes with the "free movement of persons". As immigration from other EU countries has been one of the main issues in the referendum, such an arrangement is probably unacceptable to the UK people. The lack of ability to negotiate would most likely also prove to be a barrier. As a result, some level of tailored access solution is likely to be required even if this starting point were to be adopted. If the UK opts to stay out of any such arrangements with the EU entirely (at least temporarily), in order to get the relationship it wants, it could become what in European parlance is known as a "third country". There are two passports for third country entities that are being introduced in 2018 under the arrangements known as MiFID II, which give investment firms, and banks in their investment business activities, passports to access for professional and more sophisticated clients. MiFID II may provide the base level framework for a new arrangement for the City with the rest of Europe.

The Different Models

There are several legal models that the UK government could negotiate.1 These could include:

Complete withdrawal from the EU, with new bespoke bilateral agreements that retain freedom of trade and/or establishment, without membership of an existing European bloc. Joining the European Free Trade Association ("EFTA") and re-joining the EEA (i.e. like Norway, Liechtenstein and Iceland). Joining EFTA and relinquishing membership of the EEA whilst gaining access to the European markets through bilateral agreements (i.e. like Switzerland). Entering into a customs union with the EU (i.e. like Turkey, although the Turkish-EU customs union is limited to trade in goods). Entering into a free trade agreement with the EU within the World Trade Organisation framework (i.e. like Canada). The map below depicts the countries that are currently in the EEA as well as the candidate EU member states.

Brexit Negotiation Process

The process for exiting the EU is established under the Treaty on European Union.2 The provisions were inserted into the Treaty after Greenland exited the EU, as there was no mechanism at that time. An exit under the Treaty provisions has therefore not occurred before. The Treaty provides that a member state may withdraw from the EU...