The financial services sector will be greatly affected by a UK exit from the EU, especially if the UK also leaves the EEA. Implications of the effects of the referendum will be difficult to predict until negotiations start under Article 50. Financial Institutions who use the UK as a hub to work in the EU are likely to be most affected. Several scenarios exist as uncertainty remains for the fate of UK’s FIs.
If the UK remains in EEA
- UK FIs who have ‘passporting’ rights will be able to continue business activity across the EU without needing authorisation in each country.
- These FIs can:
- Set up a branch in another EEA state.
- Provide cross-border services via post, phone or internet from its home EEA state.
- FIs without passporting rights who wish to export products or services are required to obtain authorisation per EEA state.
If the UK exits the EEA
UK FIs would lose passporting rights unless a trade arrangement is negotiated. UK FIs would be treated as firms based in a non-EEA state wishing to operate in the EU market (such as USA or Switzerland).
- The UK can establish an equivalence agreement to rely on EU’s supervision framework: a simplified Single Market access applied at sub-sector level.
- The EU will assess the UK FIs’ compliance with an ‘equivalent’ foreign framework based on detailed criteria to assure that it meets EU legislation objectives.
- In the absence of an equivalence agreement, UK FIs can:
- Apply to be an authorised entity in each EEA member state, OR
- Establish a subsidiary in an EEA state where they can then apply for passporting.
- It’s unlikely for UK FIs to establish subsidiaries in EU member states to carry out business from the UK. A bank subsidiary is a separate legal entity, with separate financial resources and governance governed where it resides. If UK-based FIs establish a subsidiary within an EU member state, a large portion of operations will need to be transferred to the location they wish to use for passporting rights.
- MiFID II could go into force January 2018, and UK firms could possibly rely on it.
- MiFID II allows access to the EU Single Market for non-EEA investment firms.
- An equivalence agreement is required.
- Qualified UK firms could then service professional clients without needing a branch in each EEA member state.
Source: EY Report: UK/EU Working Through Uncertainty. Practical Considerations for Financial Institutions.