Brexit will impact the financial services sector in many ways. Key concerns include how to access markets – in Ireland, the UK and the EU.
The challenges and options posed by Brexit directly affect banking, insurance and reinsurance, investment services, fund management, payment services and other financial services activities. Firms are facing uncertainty over the outcome of the Brexit negotiations (and what the UK’s relationship with the EU might be by mid-2019) during a period of enormous regulatory change. MiFID II, the IDD, PSD 2 and GDPR are all in play, and each brings significant regulatory challenges.
The five biggest Brexit-related issues for the financial services sector are:
1. Loss of Passports: across insurance, banking, investment services, fund management, debt capital markets, payments and more, UK firms may lose their current capacities to service an EU client base unless they set up within the EU or can avail of equivalence permissions. Remember, however, that these provisions are limited. They are not available in banking (deposit taking), lending, payment services, mortgage lending, insurance, insurance mediation or in the distribution or the management of UCITS.
For UK insurers, the choice is between establishing an EU head office which could service the entire EU 27 or setting up Third Country branches in specific markets. In the payments sector, having an EU head office seems a necessity given the nature of the service and the customer base.
Banking will be impacted similarly.
In the investment services (MiFID) sector, the loss of a MiFID authorisation may have a very serious impact, given the less-than-optimal Third Country regime. Although Third Country investment firms can provide services to retail and opt-up professionals based in the EU, they can only do so if they set up a branch in the EU. In the case of per se professional clients and eligible counterparties, Third Country firms who do not set up an EU branch may be able to rely on individual national regimes – allowing them market access until ESMA deems their jurisdiction to be “equivalent”. Ireland plans to allow such access but others in the EU 27 may not. It is a country-by-country determination, exposed to changing views and sentiments.
Brexit may also mean that UK firms will not be able to be UCITS ManCos. This will have a negative impact on their ability to market their funds in the EU unless they set up an EU UCITS ManCo, or either engage a third party ManCo or use a third-party fund platform. Even then, they will face real marketing challenges. The loss of passporting rights – at least until some probably very far off date – for UK AIFMs will also impact sales into the EU, although NPPRs may offer some options in several jurisdictions. Not having an AIFM management passport, and the inability to be a Super ManCo, are also potentially significant drawbacks.
2. Cost Impact: whichever Brexit strategy they choose – disregard the EU (or the UK) market entirely and focus elsewhere, establish a substantive EU presence, or engage a third party ManCo – firms face significant additional costs. These include: the cost of an EU authorisation (capital, boards, employees, set up costs, etc.); the cost of engaging a third party and/or reworking existing contractual arrangements; and the “cost” of losing the economies of scale (or at least their potential) arising from being able to sell a single product in the UK and across the EU 27. Firms and their clients may end up bearing those costs.
3. Longer Term Competitive Impact: UK firms who decide not to create a substantive EU presence run the risk, over time, of falling behind EU competitors who will have the capacity to generate revenue from an EU 27 client base. In time, that could make UK firms more vulnerable to takeover by EU competitors.
4. Loss of Influence: not having a voice at the ESMA, EIOPA or EBA tables will mean that the UK will not be able to influence key financial services policy making. That will be a loss for the UK, and for the EU 27.
5. Product Marketing Impact: the capacity of UK firms to market their products within the EU may be severely impacted by a hard Brexit. UK asset managers and insurers, even those with UCITS or EU AIFs in their product menus, may find that the lack of an EU authorisation means that they cannot sell their products themselves and have to rely on third parties or on private placement regimes. Sales into the UK of EU products may likewise suffer a loss of straightforward marketing opportunities, with product producers possibly having to duplicate structures for the different market places.
Dillon Eustace can help firms operating in all affected sectors with their Brexit decision-making. We provide frequent updates on key developments, explain the practical issues, and offer help with new authorisation processes, authorisation conversions, and new product launches. We can also engage with regulators – and, through industry organisations, with government – to seek to improve the Brexit-related solutions which Ireland can offer.
Whatever your focus – a fund manager looking to maintain distribution capacities for an EU target client base, a UK investment firm struggling to understand what the Irish national regime may be pending an equivalence determination, an insurer looking to set up a third country branch or EU head office in Ireland, or a payments firm looking to maintain your EU base client – we can help you understand and address the challenges that Brexit poses to your business and how to take advantage of the opportunities which it may offer.