Is Your Financial Services Provider Ready For A #NoDeal Brexit?

With a 'No Deal' Brexit now central to Tory government strategy, it's critical to ensure the right financial contingency plans are in place for a 'cliff edge' exit with no transition period from 29 March 2019. Unfortunately, however, the European Banking Authority says it is seeing "little evidence of financial institutions communicating effectively to their customers on how they may be affected by the UK withdrawal" and those institutions' Brexit arrangements. So customers have to question their providers about those arrangements. Here's a quick guide to steps those institutions might take, depending on whether they are based in the UK or elsewhere in the EEA... if you do not receive credible, satisfactory commitments to service continuity from existing providers within the next few weeks, you should set-up alternative and/or back-up relationships as soon as possible.

EEA-based firms supplying services into the UK

These firms will have a short window ahead of Brexit day in which to seek temporary regulated status:

• temporary permission to continue operating in the UK for a limited period after Brexit if they currently passport into the UK under the Financial Services and Markets Act 2000 (FSMA) or the e-money or payment services regimes;
• temporary recognition if they are third country central counterparties; or
• temporary registration if they are EU-registered trade repositories. 

If EEA-based firms carry out operations in the UK after Brexit in reliance on EU legislation without entering into these temporary regimes, they may be carrying on regulated activities in the UK without appropriate permissions, which would be a criminal activity and/or mean they cannot meet their contractual obligations.

EEA firms that do not gain full authorisation through the temporary regimes can only continue to carry out new business to the extent necessary to 'run-off' pre-existing contractual obligations in the UK for five years (15 years for firms performing obligations under insurance contracts). They cannot undertake new business or agree new contracts with UK customers. A "supervised run-off" arrangement applies to those firms with a UK branch, firms who enter a temporaty regime but exit it without UK authorisation and firms that hold top-up permissions before Brexit. A "contractual run-off" regime will apply to firms without a UK branch that do not enter a temporary regime or do not hold a top-up permission; and will apply for the purposes of winding down UK regulated activities in an orderly manner.   Firms with a UK establishment will retain their existing membership of the Financial Services Compensation Scheme. 

A run-off regime for payments firms and e-money firms that do not enter the temporary regime or leave it without full UK authorisation will apply for five years, either on a supervised or contractual basis (though the FCA can require supervised run-off for firms to demonstrate they are safeguarding client funds). 

A run-off regime will apply for non-UK Central Counterparties that are eligible for, but do not enter, the temporary recognition regime, for a period of one year starting on exit day. If a non-UK CCP entered the temporary recognition regime but exits it without the necessary permanent recognition, the Bank of England will determine a non-extendable period for recognition up to a year. 

There will also be a run-off regime for trade repositories that are removed from the temporary registration regime without the necessary permissions to continue to provide services to UK firms, for a non-extendable period of one year, unless the FCA sets a shorter period. 

UK firms dealing with EEA residents

The FCA has suggested that UK financial services providers consider the following questions ahead of Brexit. If the answer is 'Yes' to any of them, then the service provider should understand the legal basis for that scenario and whether another basis is necessary after Brexit - including additional regulatory permissions or a new subsidiary with the right authorisation or agency and necessary permissions in a remaining EEA member state. 

• Do you currently provide any regulated products or services to customers resident in the EEA? For example, you might provide financial advice to EEA based customers. Or you might have insurance contracts either with EEA based customers or which cover risks located in the EEA which require regulatory permission in that country in order to be serviced. 
• Do you have customers or counterparties based in the EEA, including UK expatriates now based in an EEA country? 
• Are you marketing financial products in the EEA? This includes products marketed on a website aimed at consumers in the EEA. 
• Do you have agents in the EEA or interact with any intermediary service providers in the EEA? For example, you may use an insurance intermediary to distribute products into the EEA. 
• Does your firm transfer personal data between the UK and the EEA or vice versa? 
• Does your firm have membership of any market infrastructure (trading venues, clearing house, settlement facility) based in the EEA? 
• Are you part of a wider corporate group based in the EEA, or does your firm receive any funding from an entity in the EEA? 
• Do you outsource or delegate to an EEA firm or does an EEA firm outsource or delegate to you? 
• Are you party to legal contracts which refer to EU law? 

There will now be insufficient time for any provider to get a new authorisation in another EEA member state, and even setting up an agency relationship would be very tough to do within the next few months.

Firms should be informing clients about issues such as:

• the implications of Brexit on the specific services they provide and the implications for the relationship between the client and the firm;
• the actions taken by the firm to prevent or detect problems, including how they will deal with client inquiries, changes in competent authorities or protection under national compensation schemes;
• the implications of any corporate restructuring, including changes to contractual terms or contract transfers;
• other impact on contractual and/or statutory rights, including the right to terminate existing contracts and cancel new contracts, and any rights of recourse and how to pursue them. 

If you do not receive credible, satisfactory assurances of service continuity post-Brexit from existing providers within the next few weeks, you should set-up alternative and/or back-up relationships as soon as possible.

"No-Brainer": UK Firms Switching From English to Irish Law And Courts For Their New EEA Hubs

Sadly, we are at "the point of no return" for Brexit preparations by UK businesses who supply goods or services into the remaining EU27 countries - or to non-EU markets under EU trade arrangements. Many will have already been making public announcements to reassure their regulators, customers and suppliers that they've planned how to keep their operations running smoothly in the event of a "No Deal Brexit" on 29 March 2019.  But now they have to execute those business continuity plans.

While the politicians seem to think they still have 6 weeks to negotiate a UK withdrawal agreement, few businesses would have that luxury. Working back from 29 March, they have to consider contractual notice periods (some mandated by law), as well as software development and operational process changes that will need to be fully tested and running in good time before that day.

Of course, the timetable is just the tip of the preparation iceberg. Below the waterline other preparations may have been happening for some time, such as establishing a new entity in an EU27 country and getting it authorised or licensed; opening local bank accounts; leasing office premises; transferring or employing management and staff; relocating or purchasing computers and other equipment, stock or assets, and related software and data licenses; and re-contracting some of the more critical affected customers and suppliers through their new entity.

These preparations raise numerous tax, legal and accounting issues in their own right - including the fact that the UK government is still unclear on much of the official rules, processes and procedures. But the choice of law under which each new entity contracts with customers and suppliers, and which courts will govern disputes, are among the most critical to making life as easy as possible in the transition.

Both EEA-based parties will probably want the contractual terms to remain broadly the same as any current English law contract, even if certain aspects might need to be re-negotiated. Billing and payment details, currency and pricing would likely need to change, for example; as will the legal basis for sharing EEA-residents' personal data with UK operations. There won't be an EU "adequacy decision" on the UK's data protection standards before April 2019 - and no timetable can even be agreed for reaching one unless and until the UK has actually left the EU. The General Data Protection Regulations as enacted where the new entity is established will apply to the new entity's collection, use and storage of personal data, even though the customer-facing privacy policy may remain broadly the same and the customers will still have consistent rights to complain about misuse under their own national data protection laws. In turn, the parties will no longer want the contract to be governed by English law and courts, to avoid the need to worry EEA customers and suppliers about the extent to which English law inevitably diverges from the law in EEA member states.

In these circumstances, choosing the application of Irish law instead of English law to govern at least the commercial aspects of a contract becomes a "no-brainer", because at this stage it's substantively very similar to the law of England & Wales, and far more so than the law of any other EU country. Ireland is the only other purely common law jurisdiction in the EU today, and will be alone after Brexit. The few technical differences include, for example, the absence of the right for any non-party to enforce a benefit under the agreement, which the UK allowed through statute in 1999, or different monetary thresholds for the jurisdiction of familiar types of courts. But such differences can be either simply flagged and understood or explicitly accommodated if necessary (to cite the relevant example, most parties try to limit or exclude 'third party rights' anyway, but the rights can also be explicitly specified). So, while the customer is well advised to run a final check of the contract with independent local Irish counsel, it will not face the comparatively awkward and expensive exercise in understanding the numerous substantive differences between English common law and the codified civil law system of other EU member states.

Of course, it remains possible to agree that the commercial elements of the contract and provision for its enforcement are governed by Irish law and courts, even though the regulated activities of one or other party to the contract (and any regulatory complaints) may be governed by the law of another EU member state. But it has been quite common until now for, say, a financial institution established and regulated in another member state to contract with its customers in the English language under English law (or Irish law, for that matter). So customers should have no problem with a switch from English to Irish law on that basis. 

Note that the process for transferring contracts can be a bit tricky, however. For instance, some UK businesses may seek to merely "assign" their English law contracts to a new entity (possibly under a provision that appears to allow this even without the other party's consent). But under English law it is not possible for a party to assign its obligations under a contract - just its own rights or benefits (e.g. the right to receive payments).  So the transfer of existing contracts to a new entity (and the other changes mentioned) would generally need to be done by way of "novation", which necessarily involves the consent of the other party.  The process of amending agreements may also be constrained by law, such as under national regulations implementing the second Payment Services Directive. These provide for a two month notice period for changes, and a right of termination where it is agreed the changes can be proposed unilaterally and the payment service provider takes that route. It's awkward enough for the ongoing relationship that the process might provoke a renegotiation (or that consent to novation might not be forthcoming at all), without actually being seen to trigger a positive right for the customer to terminate within a finite notice period (think Article 50)!

Of course, this all relates to the new EEA-based entity.  The group head office, and perhaps the UK entity, will still have the job of tracking the extent to which English law (and therefore the basis of the offering to UK customers) diverges from Irish law, EU rules and the offering to EEA customers. 

But you'll just have to blame the Brexiteers for that!