Since 29 March 2017, when the UK government triggered Article 50 of the Lisbon Treaty, negotiations to leave the European Union have been under preparation. The outcome cannot be precisely predicted, especially after the recent elections. This notwithstanding, most banks and companies from other industry sectors already started making plans for the withdrawal from the European Union before the dialog resumed on 19 March 2017. Mr. Cryan, a British citizen and CEO of Deutsche Bank, in recent times repeatedly and openly encouraged his favorite, Frankfurt, to seize this opportunity.
Traditionally, overseas banks set up their headquarters in London to provide services to clients in the EU. Via this structure, some of the UK-based organisations are heavily involved in cross-border-activities into the European Economic Area (EEA) based on the passporting system.
Impact of Brexit varies across different banking products
The highest potential impact is seen for corporate loans and deposits due to requirements for local authorisations for such activities in the absence of passporting. Lower impact for other product categories is based on the assumption that UK entities will be able to access the EEA market or that an equivalent regime under a new regulation will be achieved. In case these assumptions do not hold, the impact for specific product categories will increase.
Brussels already pointed out that Britain cannot be expected to retain the same advantages outside the EU as inside. If there is no deal on financial services, banks will be hit harder than other industries. In conclusion banks have to plan for the worst case, in which they might lose the current access arrangement covered in eight single market directives:
Capital Requirements Directive (CRD IV) (2013/36/EU)
Solvency II Directive (2009/138/EC)
Insurance Mediation Directive (2002/92/EC)
Markets in Financial Instruments Directive (MiFID) (2004/39/EC)
Undertaking Collective Investment Scheme (UCITS) Directive (85/611/EEC)
Payment Services Directive (PSD) (2007/64/EC)
Second Electronic Money Directive (2009/110/EC) and
Alternative Investment Fund Managers Directive (AIFMD) 2011/61/EU)
In that case banks which are domiciled in the UK would be treated as every other institution outside the EEA with no option of the passporting regime.
Financial institutions with a presence in Europe must fulfil local regulatory requirements
Overseas banks need a legal entity to continue cross boarder operations. For this purpose they can establish a subsidiary in continental Europe. Banks seeking to relocate their business units need to get insight into the EU regulation practices early on in order to approximate effort, costs and consequences of the supervisory process. It is advised not to wait for confirmation on how the industry will be regulated after Britain exits the EU.
Possible European financial centres
Some banks have already announced that they are going to establish a legal entity presence in Germany. From among the other Central European countries particularly Luxembourg, Austria and the Czech Republic are trying to attract London movers. Specifically the cities of Frankfurt, Luxembourg City, Berlin, Vienna and Prague were highlighted. The ECB and the German Central Bank stated that ‘halfway approaches’ and ‘letterbox companies’ set up to operate as banks’ businesses in Germany would not be sufficient and there would be a need for any branch to retain chief responsibility for its business”.1 The ECB insists that all new euro area entities meet the regulatory standards. In terms of reporting approaches, the ECB announced that temporarily and under certain conditions, banks might use internal models that have been approved by the UK’s Prudential Regulation Authority, but did not substantiate a timeframe so far.
Banks have limited timescale for realization
Going forward, third country banks have to set up offices in continental Europe and shift operations away from the UK by moving staff, technology and people. They must achieve the same standards as European credit institutes – including capital, liquidity, solvability and integrity of business operations. Regulatory costs will inevitably rise. This process will demand a realistic timeframe between two and four years, depending on the structure of the individual organization. Additional extensive changes of financial regulations are expected to come into force in the course of the 2017 to 2019 period. Establishing a legal entity and organizational structures without interrupting core business activities is a demanding task especially considering the limited timeframe.
More Information: www.syncwork.de/en/brexit