The impact of Brexit on securities services (so far)

29 June 2021

The transition period for the UK leaving the European Union (“Brexit”) ended on 31 December 2020. In the months before the transition period ended, the UK converted into law any existing EU regulations that had direct effect in the UK at the end of the transition period. During this “onshoring” process the UK in some cases made technical and other amendments to the legislation so that it would work in the UK after Brexit. EU Directives applying before 31 December 2020 already formed part of UK law, so did not need UK onshoring.

UK/EU Trade & Cooperation Agreement and the Financial Services Memorandum of Understanding

On the 24 December 2020, before the transition period concluded, the EU and UK agreed on the terms of the Trade and Cooperation Agreement or TCA. Although this agreement was regarded as a major political turning point, the TCA is primarily a trade agreement. It does not address financial services in any detail and provides no new arrangements for financial services to replace the existing “EU passports”. To this end, the TCA included a commitment to agree a Memorandum of Understanding between the EU and the UK by March 2021 that should establish a framework for structured regulatory cooperation on financial services. Following further EU/UK discussions, the UK government announced on 26 March 2021 that technical discussions on the text of the Memorandum of Understanding (MoU) had been concluded. It added that the MoU, once signed, would establish the Joint UK-EU Financial Regulatory Forum to “serve as a platform to facilitate dialogue on financial services issues”.

The draft MoU has not yet been issued publicly, and there is no indication so far of the EU granting any general access by UK financial firms to EU markets. Accordingly, for the time being market participants are limited to using the information that has been provided so far by regulators in both the EU and UK, and it is still not clear what the path towards any long-term equivalence in financial services really looks like.

EU temporary permissions to the UK

There are some specific permissions relevant to securities services that the EU has granted temporarily to the UK. These are primarily time limited provisions that the EU has adopted to mitigate the impact of the end of the Brexit transition period and for the most part, these provisions are still in effect. For example, the EU recognised any authorised UK-based CSD (effectively Euroclear UK & Ireland - EUI), but only until 30 June 2021. Irish securities settlement moved from EUI to Euroclear Bank on 15 March 2021. UK-based authorised central counterparties or CCPs are recognised by the EU until 30 June 2022.

Also, in February 2021, the EU Commission issued a draft decision paving the way for data transfers between the EU and UK after the current temporary adequacy arrangement expiring on 30 June 2021. Approval by representatives from the EU member states is still needed. However, aside from the few time limited provisions and the adequacy decision on data transfers, the EU has not granted general equivalence for UK financial services.

Investment funds’ distribution from the UK into the EU

There has also been impact on the distribution of funds from the UK to the EU. It’s worth noting that the limited range of permissions by the EU to the UK has already had wide-ranging effects for investment funds. In particular, EU “passporting” rights for financial services are no longer available for UK firms, meaning that:

  • UK AIFMs can no longer market UK AIFs under the marketing passport
  • UK AIFMs can no longer manage EEA AIFs
  • UK UCITS are now treated in the EEA as non-EEA funds

Driven by these limitations post-Brexit, the UK authorities and industry are currently assessing how to increase the attractiveness and competitiveness of its UK investment funds regime, whilst recognising the requirements of cross-border marketing and acceptable tax treatment. To this end, there has been a UK funds “call for input” consultation on issues across both tax and regulation which closed on 20 April 2021), and there is a UK Long Term Assets Funds consultation closing on 25 June 2021.

UK temporary provisions for UK firms

To help UK firms adapt to their new requirements, the UK Treasury has given UK financial regulators the power to make transitional provisions to financial services legislation for a temporary period. Temporary Transitional Power (TTP) applies on a broad basis until 31 March 2022. During this limited period, firms can continue to comply with their pre-existing requirements whilst preparing for full compliance with the onshored UK regime. Parts of MiFID II, EMIR, Securities Financing Transactions Regulation and Market Abuse Regulation have been excluded from this process however and, for these pieces of legislation, compliance has had to be immediate.

UK temporary provisions for EU firms

We need to look in addition at what the UK is allowing EU firms to do. The UK’s temporary provisions for EU firms are still in effect. These are the UK’s Temporary Permissions Regime (TPR) and Temporary Marketing Permissions Regime (TMPR) which effectively allow EEA-based firms and funds that were passporting into the UK at the end of the transition period to continue operating in the UK for up to 3 years until 31 December 2023, but firms had to apply before the end of the transition period. During this limited period, it is expected that EEA firms will seek full authorisation in the UK and funds will need to at a minimum to notify the FCA under the National Private Placement Regime (“NPPR”).

It’s also important to keep in mind that the UK landscape post the Temporary Permissions Regime is still mostly unknown. The UK is working through the pipeline of EU regulations. The UK Treasury announced on 23 June 2020 certain areas where the UK planned not necessarily to follow EU rules. Divergence may therefore occur in certain areas, such as the CSDR settlement discipline regime, ESG disclosures, areas of Solvency II, Digital and PRIIPs. UK proposals in these areas are being developed by the UK authorities in discussions with market infrastructures and institutions. However, while there would be some differences in the UK approach, the overall objectives are, so far, expected to be broadly the same.

In conclusion, there’s a lot to take in on this complex subject, which evolves week by week. Involved participants need to continue to watch developments on both sides of the Channel.

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