Financial contingency measures for a no-deal Brexit: Royal Decree-Law 5/2019
12 March 2019
On 2 March 2019, Royal Decree-Law 5/2019, which sets out contingency measures in the event of a no-deal Brexit, was published in the Spanish Official Gazette (the RDL). The Spanish Government approved the RDL to regulate certain aspects regarding the exit of the United Kingdom and Northern Ireland (the UK) from the European Union, which is due to take place on 30 March 2019, without agreement.
The RDL will enter into force on 30 March 2019, the date from which the EU Treaties will no longer apply to the UK, but only if a withdrawal agreement is not reached between the EU and the UK before such date. Nevertheless, the RDL will need to be ratified by the Permanent Commission of the Spanish Parliament within 30 days following its approval.
In article 19, the RDL includes specific contingency measures for the financial sector and financial services provision entities. In addition, on 5 March 2019 the Spanish Capital Markets Commission (the CNMV) published a brief release with few clarifications with respect to these financial contingency measures. The purpose of article 19 is to prevent increased uncertainty and loss of access to the European market from affecting financial stability or weakening the protection of customers.
The entities subject to these contingency measures are financial entities domiciled in the UK, authorised or registered by the national competent authority and operating in Spain. The measures comprise the following:
Contracts: the RDL reinforces the principle that existing contracts for the provision of financial services (such as banking, securities or insurance) and those that were entered into before 30 March 2019 will remain in force. This rule was already the straightforward conclusion of the careful interpretation of Spanish law and contract principles, except, maybe, for insurance. Saying that, it is positive that the RDL formally clarifies the position at law on this matter.
Entities’ authorisation: affected entities will be subject to the third country entities’ regime and they must therefore obtain the requisite licence to continue their operations. The rule clarifies that they need to obtain a licence in order to: (i) renew existing financial services provision contracts, to amend them to agree new services in Spain, to modify the essential obligations of the parties, and to carry out those activities linked to contract management which require licence; and (ii) enter into new financial services provision contracts. The RDL specifically sets out that any activities related to contract management not falling within such cases will not require the new licence.
This provision also confirms the position at law. UK entities will be considered third country entities and will have to obtain a licence to continue their operations. However, the RDL goes further since it formally clarifies that the performance of activities linked to contract management that do not require licence can be still carried out without a new authorisation. For example, legacy transactions (such as loan or derivative transactions entered into when the UK entity had licence) can continue and so contract management for those transactions is allowed without licence to the extent that those management activities are not within the regulated ones, such as new lending or new trade execution).
Temporary regime: when authorisation is required for the management of existing contracts, the original authorisation granted by the UK competent authority will be temporarily extended for nine months after 30 March 2019, however only for the purposes of:
a) terminating or assigning to a duly authorised entity the agreements; or
b) applying to obtain a new licence under Spanish legislation. In this case, the nine month period will begin on: (i) the date of the application for the new licence; or (ii) the date of entry into force of the RDL, whichever occurs earlier.
During the nine-month temporary period, UK entities will be subject to the regime that applied to them before the withdrawal. This regime will cover most type of the projects of financial institutions to adapt to Brexit (Spanish authorisations, third country regime authorisations and EU licence with passports to Spain). Either they can benefit from paragraph b) if they have applied for a Spanish licence or from paragraph a). Those entities which do not intend to apply for a licence will be able to benefit from the alternative in paragraph a) in order to terminate or assign their contracts.
These paragraphs are, in our view, alternatives (it is so expressly said in the Recitals of the RDL), so an entity can benefit from one or the other. This is the way the CNMV has interpreted the RDL in the CNMV’s release, stating that the transitional period will end in any case, irrespective of the date of submission of the application, nine months after the date of the effective withdrawal of the UK, which is 31 December 2019. Further, the CNMV has provided an email address (email@example.com) on which affected entities may submit any queries.
Finally, the Bank of Spain, the CNMV and the General Directorate of Insurance and Pension Funds may take additional measures or require additional information to exercise their supervisory faculties or to ensure the protection and best interest of the customers of financial services. In case any of such measures is not complied with or additional information is not provided, the Bank of Spain, the CNMV and the General Directorate of Insurance and Pension Funds will be entitled to terminate the temporary period for that entity and impose any sanctions and fines that they consider appropriate.