What is Brexit?
Brexit is a shorthand term derived from ‘Britain’ and ‘exit’ used to refer to Britain’s split from the European Union. In 2016, a referendum vote (for everyone of voting age) was held to decide whether the UK should remain in the EU or leave. A good majority out of the 30 million people who voted favored that the UK should leave the EU. One of the common economic arguments often put forward for Brexit is that EU membership is hampering U.K.’s trade ties outside the trading block.
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Brexit: what are the main challenges for the financial services industry?
After four decades of continuous membership, the United Kingdom is all set to make a great exit from the EU in 2019. This will be the most complex demerger ever contemplated, having severe impacts. It includes the potential disruption to the lives of millions of European nationals living outside their home country, the disruption to complex supply chains in sectors such as automobiles and aviation, and the disruption on capital flows and the financial services industry. In this blog, our experts in the financial services industry have analyzed the impact of Brexit on the sector and what needs to be done next:
Passporting
Presently, a company in the financial services industry that is licensed in one EU member state can in principle conduct business throughout other countries in the EU by passporting their license across national borders. Chances are that the UK decides to stay in the European Economic Area (EEA). EEA provides its members with access to the EU Single Market. It is subject to European law and jurisprudence in respect of the ‘four freedoms’, which include the free movement of goods, services, people, and capital. Members are also required to pay a financial contribution to the EU. In this case, companies in the financial services industry may continue the passporting of their licenses. However, the scenarios where UK seeks temporary EEA membership for a smooth exit from the EU should not be completely ruled out.
Mutual recognition
For much of the early negotiation phase of Brexit, the British government preferred to establish a mutual recognition system. This was an agreement between parties to maintain comparable rules to accept each other’s findings as binding in their own city. For companies in this financial services industry, this would require the establishment of a bilateral body that jointly agrees to objectives including financial stability, consumer protection, and dispute management. Although each party would have different procedures to achieve the agreed objective, the ultimate goal would be ensuring consistency of outcomes.
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Equivalence
In theory, equivalence offers an easier method of facilitating cross-border business. The EU examines the regulatory and supervisory framework that exists in a given country for a given business activity and determines whether the rules in the said third country are equivalent to those in the EU. In case they are, the companies in the financial services industry from the said country are permitted to conduct cross-border business. Given that the UK and EU are at a point of perfect regulatory convergence provides a means by which firms established in the country could continue to operate cross-border, post-Brexit. Equivalence is likely to be the foundation of UK’s financial services agreement, with the UK seeking a declaration that the city of London is fully equivalent to the European Union by reference to a common legal and regulatory framework. This translates to the fact that a deep understanding of both the functioning and limitations of this framework is a prerequisite for post-Brexit regulatory management.
Relocation
Another option available to companies in the financial services industry who are conducting cross-border activities is relocation. Firms in the financial services industry that have their headquarters in London could consider opening a licensed EU headquarters in an EU-27 member state. If the backbone of the future UK-EU agreement is equivalence, then those activities for which equivalence is not permitted would be subject to relocation, possibly with legacy book transfer.
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