14 mars 2022

Should UK financial services firms hit the M20 southbound?

As we all very much aware by now, European Law has ceased to apply on January 1, 2021, within the borders of the UK.

As a result, banking, financial and payment institutions, as well as insurance institutions, have lost the right to operate in the European Economic Area (EEA) and sell financial or insurance services to customers located in the EEA without the appropriate authorization delivered by a member state of the EEA.

Passporting, which allowed UK firms pursuant to the principles of freedom of establishment or free provision of services within the EEA to conduct business in EEA member states based on their UK licence delivered by the Financial Conduct Authority and/or the Prudential Regulation Authority, is not effective any more since January 1, 2021.

At first, like many of us not involved with the negotiation of Brexit, I just wondered how it was possible that no one had thought worth to extend some kind of bilateral agreement between the UK and the EU that would organize the continuation of financial services between the UK and the EU after December 31, 2020. Some may have expected an equivalence arrangement that would rise from the dust once it had settled. Alas, we have been waiting for almost a year now and nothing is showing and most likely will ever show.

In fact, an unspoken consensus must have been reached over the fact that the financial services berthed up the Thames were too well anchored to slip across the Channel and run aground to the other side and that the EU would never dare to suddenly jeopardize its Euro clearing and settlement.

At the same time, the EU had much to do looking after itself and it had its own political consensus over its competing financial hubs to postpone decisions that would hasten the choices to be made to favour one localization from another. Brexit also intensified competition among EU Member States. At least, when the UK was part of the EU, nobody probably ever seriously thought of challenging the City as EU’s leading financial services hub.

Whatever the consensus was, the show must go on and we certainly all had to agree to this; so, financial services continued as if Brexit never happened until Ryanair announced it would delist from the LSE.

On or around December 17, 2021, Ryanair (RYA.I) will delist from the London Stock Exchange after having been traded at LSE for twenty years. As EU commercial aviation regulations (Art. 4(a-e-f) of Regulation (EU) 1008/2008) require airlines operating pursuant to an EU Aircraft Operator Certificate to be effectively controlled by EU shareholders holding a majority equity stake, Ryanair was wrestling to scoop out its UK shareholders after the UK was no more part of the EU. Doing so Ryanair is actually not complying with specific « post-Brexit rules », as such commercial aviation rules existed long before Brexit, but merely dealing with the legal consequences of UK’s departure from the EU.

Ryanair delisting is a wake-up call.

At some point former EU regulations will continue to be enforced with UK now being a Third Country.

And then, a few days later, I couldn’t help but notice this excellent article in the Financial Times November 23, edition, written by FT’s business columnist Helen Thomas reminding the lot of us that « Brexit is a slow bleed for the City » despite the business-as-usual attitude we have been observing for a year in the financial services industry.

Possibly the noise in the background was so faint, because of the pandemic, because of the accepted status quo on both sides, and because the larger players have relocated long before Brexit, that it did not shake the financial services industry out of the belief that a consensus would last. There it is, however, an inconspicuous disturbance in the background compared to the raging fisheries quarrel or the Northern Ireland Protocol, but now revealing itself as the self-imposed COVID truce subsides.

Who would, however, dare to vouch that the EU has no interest to reinforce its « strategic autonomy in financial services » ?

The European Commission’s communication to the European Parliament, the Council and the European Central Bank on January 19, 2021, on the strength and resilience of the European economic and financial system (COM/2021/32 final) should cast no doubt on the EU’s interest to foster its financial « strategic autonomy » and this will begin by enforcing EU regulations. In this respect, I think it is worth giving a little emphasis to the public statement issued last January 2021, by the European Securities and Markets Authority (ESMA), the EU’s securities markets regulator, on reverse solicitation. « With the end of the UK transition period (…) some questionable practices by firms around reverse solicitation, where the product or service is marketed at the client’s own exclusive initiative, have emerged, » writes ESMA before highlighting the sanctions for the provision of investment services in the EU without proper authorization.

And the recent adoption by the European Commission on November 25, 2001, of a package of measures with respect to investors’ access to company and trading data as part of EU’s 2020 Capital Markets Union Action Plan carries the message that the EU effectively intends to reinforce its financial « strategic autonomy ».

So, my word of advice to UK financial services firms that are still providing services in the EU without a proper setup would be « please go to boarding gate ».

What this means is that UK firms that were doing business in the EEA until December 31, 2020, and continued to do so after January 1, 2021, should now be established in an EEA member state and authorized by an EEA regulatory authority (National Competent Authority or NCA) -this obligation extends to any UK firms providing banking, financial, payment or insurance services within the EEA- and it means that for those which are not, it is time to proceed to the gate.

UK firms should not rely on the impression that Brexit has only marginally impacted their FCA licence but rather avoid a « business as usual » approach providing a false and treacherous sense of comfort. In reality, UK firms still operating under their FCA licences with the feeling that nothing currently prevents them to do so in the UK might be far from the truth. Pursuant to its Principles for Businesses (in particular PRIN 1 and PRIN 3), the FCA has the power to sanction firms that are repetitively breaching a foreign law statute.

In addition, UK firms that have continued to provide services in an EEA member state after December 31, 2020, without a licence to operate from such member state’s regulatory authority, may face charges for felony for illegal practice in such member state as established by the European Securities and Markets Authority (ESMA) in its communication issued on January 13, 2021.

The definition of provision of services within the EEA includes either the procurement of such services or the marketing and promotion of such services to an individual or a legal entity domiciled or registered in an EEA member state, irrespective of the fact that such services are being conducted or promoted out of the UK, by a UK firm or by personnel employed in the UK. In this respect, it is important to stress that the spontaneous solicitation of a UK firm by a resident of the EEA, generally known as “reverse solicitation”, does not entitle such UK firm to provide the services without a licence delivered by an EEA regulatory authority when carried out as a regular occupation or business on a professional basis. While investment firms may benefit from certain limited exemptions, other firms such as payment services providers and credit institutions cannot.

When I had a look earlier this year at the list of formerly passported UK firms, I could not avoid wondering how many of the 1’974 UK firms on the list were still doing business from the UK.

For sure, the firms I know of, and which have finalized a proper setup in the EU, did not amount to such number. Putting aside a few that may have given up providing services in the EU, the question is how many are still exposing themselves to significant sanctions and the risk of losing confidence from their counterparties.

UK firms already complying with the FCA/PRA licensing requirements should not be overly worried about satisfying the conditions of an EEA licence. The principal issue for such UK firms would be to act late, and especially after facing claims for illegal provision of financial services.

I think that as much as important as the alert to file for an EEA licence is to know that obtaining such licence should actually not be an administrative and legal issue for firms already registered in the UK. In terms of nuisance, traffic on the M20 could possibly be a worse challenge.

Ludovic Doutreleau is a Franco-Swiss corporate lawyer based in Geneva who guides his clients through the French, Swiss and European legal environments.

WAN Avocats is an independent practice corporate law firm established in Paris and Geneva. The firm advises an international clientele in a wide range of sectors, including financial services and FinTechs.

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