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Brexit in Brief: Financial Services Investigations

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On Friday, around one thousand of our clients across the world joined us for a call to discuss the legal implications of Brexit. The message: while the weeks and months ahead may be frustrating and challenging, there is no need for panic. The precise implications of Brexit for commercial parties will depend on the post-Brexit model agreed. Financial services firms are no exception. Until there is some clarity on the post-Brexit legal regime you should use what facts are known to plan for potential contingencies, limit uncertainty and take what steps you can to protect your position.

What happens next?

As has been reported widely, the legal mechanism for Brexit is contained in Article 50 of the Treaty on the European Union. If and when the UK files a notice under Article 50, it will have two years to negotiate its terms of exit. Any extension to the two year time period requires the unanimous consent of all other 27 member states.

The post-Brexit model likely to be chosen by the UK and EU is not yet clear. There are a number of potential options available, including those summarised in the table below.

We have published a range of specialist papers focusing on the different aspects of Brexit, including post-Brexit models, and these are available here.

What are the regulators saying?

On Friday, the FCA issued a press release which noted: “firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect”.

Similarly, the European Commission has stated: “EU law continues to apply to the full to and in the United Kingdom until it is no longer a member”.

Timing is everything

Clearly regulators are correct to stress the laws which applied to the UK financial services sector on the 23 June 2016 remain the same today.

In theory, all major pieces of currently proposed EU legislation which affect the financial services sector should have been implemented by the date of Brexit (e.g. the Market Abuse Regulation, the Damages Directive), assuming Brexit happens within the next couple of years or so and implementation deadlines are not extended.

While in some areas it is conceivable that there will be pressure to deviate from or delay implementing EU legislation, it is probable that it will be in the UK’s interests to maintain broad equivalence with EU law. Likewise, most firms will want to continue with implementation plans, even in the case of legislation proposed for 2018 onwards, not least because many will have sufficient operations in other European nations to make implementation the simplest course of action (if not mandatory).

We do not yet know if firms in a post-Brexit UK will still benefit from some version of the EU regulatory ‘passport’ regime. However, passport or no passport, UK-based firms are likely to be better placed to trade into the EU post-Brexit if they maintain equivalent standards to those of EU-based firms. Some of you might be interested in a playbook we have developed on ways of restructuring to address potential loss of passporting privileges. We have also prepared a checklist for asset managers.  Please let us know if you would like to receive either of these.

The legislative and enforcement agenda

Brexit - broken egg

Britain has been the driving force behind a number of the EU's financial services projects (e.g. the AIFMD passport for third countries and Capital Markets Union). However, the UK’s European Commissioner, Lord Hill, resigned this weekend.

Even if the UK Government nominates a successor and the European Parliament approves their appointment, it is difficult to imagine the EU transferring the Financial Services portfolio (which Lord Hill held) back to the UK. As things stand, the UK is due to assume the Presidency of the EU Council for July to December 2017, but it must now be doubtful whether this happens.

The extent to which Lord Hill’s departure - and the prospect of Brexit more generally - impact EU financial services projects which Britain has been the driving force behind remains to be seen.

It will also be interesting to see how European or other member state regulators approach enforcement activities with UK entities in the run-up to Brexit.

Brexit also raises questions for the domestic legislative and enforcement agenda. For example, will a government at pains to emphasize that Britain is still open for business still want to introduce some of the broadest corporate criminal offences anywhere in the world or take a particularly aggressive stance on enforcement?

Next steps

With so many factors (access to the single market, passporting, freedom of movement etc.) dependent on the outcome of negotiations, there is limited immediate action beyond contingency planning which firms can or should take. Continuing with existing compliance and implementation strategies is, perhaps ironically, amongst the best ways to prepare for a post-Brexit world.

Further, there are activities currently covered by relevant EU legislation for which safe harbours or provisions for non-EU countries exist. Data protection and money laundering due diligence are just a couple of examples. Firms should ensure they are aware of and in a position to rely on these provisions if the need arises. Reducing the number of post-Brexit unknowns will assist in limiting uncertainty.

Firms may also conclude that their best interests require the UK or EU to act in a certain way. If that is the case, lobbying should be considered. Should you chose to lobby, you may wish to do so alone or as part of an industry group. Firms will need to ensure they are compliant with all applicable rules on lobbying. If lobbying as a group, we have produced a two page guidance note on antitrust considerations. Please let us know if you would like to receive this.

Brexit represents the largest global de-merger in history. As and when negotiations progress, the impact, timing and legal implications of such a breakup should become clearer. In the meantime, if you have any questions, please ask – either through your usual contact or our dedicated Brexit email address (A&