Outlined below are the 6 key areas of potential impact of Brexit on Banking and Capital Markets.
The lost passport: After Brexit, there is a risk that Irish and other EU financial services providers – including banks, retail credit firms, payment services and e-money firms – will no longer be allowed to passport regulated services into the UK without acquiring or establishing a locally regulated subsidiary. UK financial services providers will also lose their ability to passport regulated services into the EU. We have already seen several financial services firms announce their intention to move some or all of their regulated business to Ireland in the wake of Brexit. Ireland is an attractive location in this scenario because of the many advantages associated with its EU membership, its position as a leading global financial services centre and the fact that it is an English speaking, common law jurisdiction.
Regulatory burden: Brexit may mean that financial services firms operating in the EU and the UK will have to adhere to two different regulatory regimes, which would at the very least bring administrative complexities. Regulatory standards between the EU and the UK could diverge post-Brexit. UK regulation could become less stringent than the EU regime, as the UK – and London in particular – attempts to maintain its reputation as a leading global financial services centre and to persuade third country banks, such as those from Asia and North America, to keep their business in the UK.
Cost: the cost of complying with dual UK and EU regulatory regimes could have a significant impact on regulated financial services firms. These entities will have to balance the cost and the speed of operational restructuring. The extent of the cost impact will depend on the form that Brexit takes – a ‘hard’ or ‘soft’ Brexit and whether withdrawal is protracted or happens more quickly.
Cross border lending: it is likely that one of the key questions for UK lenders entering into cross-border transactions post-Brexit will be whether their proposed lending requires them to be authorised in the jurisdiction in which it is taking place. This will turn on several factors, including whether the lending is retail or not, given that non-retail lending is not a regulated activity in various EU Member States. However, on the retail side, the impact is unlikely to be profound given that the market for cross-border retail banking services is relatively small.
Debt capital markets: Brexit is likely to result in the loss of the UK’s ability to passport prospectuses throughout the EU. This means that any prospectus issued by a UK issuer would require approval from each individual EU Member State in which it is proposed that securities will be offered or listed. For wholesale debt offerings, which – if not listed – generally benefit from an exemption under the Prospective Directive, this may not be all that notable. But it could have a significant impact on retail offerings. This could benefit the Irish Stock Exchange, which is one of the leading exchanges in the world for listing by special purpose vehicles, providing a sophisticated listing service for debt securities.
Impact on EU Capital Markets Union and on securitisation: Brexit creates issues for the UK around securitisation, particularly in the context of the proposed new Capital Markets Union (CMU). One of the key tenets of the CMU is the concept of simple standard and transparent securitisation (STS). There is much uncertainty as to whether, post-Brexit, a UK securitisation would be able to satisfy the proposed STS criteria, in circumstances where a UK firm would not be eligible to be an investor, sponsor, originator or original lender (and consequently a risk-retainer) in an STS if it is not regulated in the EU.
Brexit may therefore strengthen Ireland’s position as the leading European jurisdiction for the establishment and servicing of securitisation structures. As of March 2016, some 1,400 SPVs were established in Ireland, representing almost a quarter (24% of financial vehicle corporation assets) of the European industry. Securitisation in Ireland is mainly international, with 86% of Irish SPVs set up on behalf of non-Irish sponsors.