Much has been written about the impact of Brexit on wholesale financial services, but surprisingly much less attention has been given to its impact on retail financial services. Perhaps one of the reasons for this is that despite well publicised initiatives like the PRIIPs Regulation, the EU has left the majority of retail financial services regulation to domestic regulators. As one expert witness said to the House of Lords enquiry into Brexit and financial services, “national retail markets have distinctive national characteristics and, as a result, distinctive national regulations”.
Should the UK and EU reach agreement on the withdrawal agreement then a transitional period (also known as an implementation period) will last from Brexit day on 29 March 2019 to 31 December 2020. Essentially during this period it will be “business as usual” for EU and UK financial services firms in the sense that the UK will continue to participate in the Single Market and the Customs Union. EU law will also apply to the UK during this period as well as EU supervisory and enforcement mechanisms including the Court of Justice of the EU.
Whilst approximately 80 per cent of the withdrawal agreement has been agreed these remains critical outstanding uses including the Irish border.
In light of this both the UK Government and the European (Commission) have been pushing forward with their contingency planning for a no deal Brexit.
EU Brexit preparedness
The Commission and the European Supervisory Authorities (ESAs) have published a number of important papers on Brexit. The Commission has published seven Brexit preparedness notices for the Financial Services and Capital Markets Union covering: statutory audit, credit rating agencies, asset management, post trade services, financial instruments, banking services, insurance and occupational retirement institutions. Each ESA has published Brexit related opinions with one of the most important of these being the sector-specific principles on relocations from the UK to the EU27 (published July 2017).
The lack of a pan European retail regime for financial services may be the reason why the Commission has not posted on its website a Brexit preparedness notice specifically for retail financial services which means that information has to be drawn, where possible, from the other notices although arguably such information tends to lean more to asset management. The same can also be said for the ESA opinions.
Commission’s Brexit preparedness notice for asset management - for UCITS, EuVECA, EuSEF and ELTIF, both the investment funds and their managers must be established and registered or authorised in the EU to manage and market funds to retail and professional investors across the EU.
Commission’s Brexit preparedness notice for financial instruments – UK investment firms will no longer be able to use the passport under MiFID II nor will EU investment firms be able to passport into the UK. Branches in the EU27 of UK investment firms will be branches of third country investment firms and will need to comply with national requirements applicable in the Member State where the branch is established or with the regime set in Article 39-41 MiFID II where applicable. The provision of services / activities is limited to that Member State’s territory.
Commission’s Brexit preparedness notice for banking services – UK entities providing banking services (and payments services as well as e-money issuing) will no longer benefit from being able to provide those services in the EU27 under the passport. Services covered by the authorisation by a EU27 Member State regulator, including services provided by branches in a third country (like the UK post Brexit), will continue to be subject to the supervisory powers of the EU27 Member State regulator which granted authorisation, including the power to restrict or limit the business.
ESMA opinion to support supervisory convergence in the area of investment management – EU27 should ensure that UCITS investors, which are often retail investors, benefit from at least the same level of protection as AIF investors.
UK Brexit preparedness
The UK Government has issued guidance notices regarding a no deal scenario. It has also gone a step further than the Commission, confirming that it is prepared to act unilaterally by providing for a temporary permissions regime. This regime is intended to limit immediate disruption to the UK market by allowing EEA firms and funds passporting into the UK to provide their services on generally the same basis post Brexit for a limited period of time.
The UK Government’s guidance notice on banking, insurance and other financial services makes a number of important points including the following in relation to customers
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 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.
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.
Obviously in a no deal scenario EU law will not apply to the UK after Brexit day and therefore HM Treasury has been issuing draft statutory instruments setting out how EU financial services legislation will be on-shored. Draft statutory instruments for the Deposit Guarantee Schemes Directive, AIFMD and UCITS Directive have already been published, although the one for the PRIIPs Regulation has so far not been published. These statutory instruments are made by HM Treasury using the power given to it under the European Union (Withdrawal) Act 2018 (Act) and are not intended to make policy changes.
Another important statutory instrument made under the Act is the Financial Regulators’ Powers (Technical Standards) (Amendment etc) (EU Exit) Regulations 2018, which sets out which of the UK regulatory authorities are responsible for particular pieces of delegated regulations made under EU financial services legislation. Unsurprisingly the FCA is listed as the relevant UK authority for delegated regulations made under the PRIIPs Regulation. It is expected that the FCA will also take responsibility for guidelines and recommendations that have been issued by the ESAs under the PRIIPs Regulation.
Setting up a bank in the UK
At the beginning of the year the PRA published a Policy Statement (together with a Supervisory Statement) updating its approach to the supervision and authorisation of international bank branches. Whilst accepting that the ability of international banks to branch into other countries is “an important component of an open world economy that benefits the UK economy” it would expect a subsidiary rather than a branch where significant retail banking activities are proposed in the UK. In terms of what is deemed to be significant, the PRA states that a subsidiary is required where retail deposit-taking activity will be above one of the following de minimis levels
More than £100 million of FSCS covered retail/small company transactional or instant access account balances.
Over 5,000 retail and small company customers.
Total potential liability to FSCS in respect of covered deposits in excess of £500 million.
No race to the bottom in standards
Whatever happens with the political negotiations on Brexit the FCA has made it clear that there will not be a race to the bottom in terms of regulatory standards. The FCA’s chair, Charles Randell, has recently commented that Brexit was not a “zero sum game” and that the FCA did not “see the UK’s withdrawal from the EU as an opportunity to join a race to the bottom in regulatory standards – quite the contrary.”
For the reasons given at the start of this briefing, retail financial services has not been given a starring role in the Brexit papers that have been published meaning that practitioners have been given the task of putting the pieces of the puzzle together. Essentially, the outlook for firms conducting retail business in the UK looks fairly settled, thanks primarily to the UK’s temporary permissions regime although arguably the publication of the draft statutory instrument dealing with the onshoring of the PRIIPs Regulation would be welcome. However, the outlook for UK firms conducting retail business in the EU27 looks less settled with the EU taking a harder line, dismissing (for the moment) a reciprocal temporary permissions regime and instead taking the approach that the UK will be a third country firm with all that which it entails.