Capital Markets/Securitisation/Bank Lending
It is difficult to accurately predict at this stage what the consequences of Brexit will be for UK based financial institutions involved in arranging and providing cross-border financing either through the capital markets or direct lending given the envisioned two year period to negotiate the United Kingdom’s exit from the EU. However, given the fundamental underpinning that EU legislation gives to this area there will undoubtedly be a significant impact. What should be noted is that the majority of the EU legislation incorporates the concept of access to the EU by “third country” institutions (i.e. non-EU institutions). Therefore, subject to any negotiated regime as part of the Brexit settlement, to continue to interact with EU entities, the UK may need to create and maintain a regulatory environment at least “equivalent” to that of the EU to access the EU markets as a third country.
One example of the above relates to one of the most important pieces of legislation from a financial institutions perspective being the Markets in Financial Instruments Directive (MiFID). MiFID is fundamental to the ability of banks and non-bank investment institutions to conduct activities across the EU including the trading of securities and derivatives, underwriting, and portfolio management. A key part of the legislation is the ability, known as “passporting”, for such institutions to conduct business throughout Europe without obtaining a licence or similar in each individual country. It remains to be seen whether reciprocity is established or whether financial institutions in the UK will be treated in the same manner as other third country entities which cannot make use of passporting and must instead establish an authorised presence in the particular jurisdiction in question.
A similar situation will arise with respect to the Capital Requirements Directive which affects deposit-taking institutions conducting services such as deposit-taking, lending and participation in securities issues. Securities issuances currently based on the prospectus directive and the transparency directive will also be affected and potentially an equivalent regime will need to be established within the UK. The manner in which the UK will fit in with the proposed Capital Markets Union that is currently being planned by the EU and the planned changes to the EU securitisation regime are also up in the air. EU regulations as to custody arrangements, trade reporting and clearing (particularly of Euro denominated securities), currency indices benchmarking, capital requirements and risk retention will all need to be considered as part of Brexit. In short there are very few areas of a UK based financial institution’s activities across the EU that will not need to be re-considered when it comes to Brexit.
Similar to the licensing to practice business throughout Europe, once a prospectus (offering circular) in relation to an offer to the public of equity or debt securities has been approved by a single member state of the European Union, such prospectus can be used to offer such securities to the public throughout the EU in accordance with the Prospective Directive. As the UK has voted to leave the EU, this automatic approval within the EU would cease to apply making it less straightforward and more expensive for UK issuers to offer securities elsewhere in Europe. The practical effect of Brexit will depend largely on the arrangements made between the UK and the EU which themselves be also be influenced by how consistent UK legislation will be with EU Regulations and what reciprocity is established.
On 23 June 2016, in public referendum, the British public voted in favour of the UK leaving the EU (“Brexit”). As a result of the uncertainty caused in the run up to the referendum, the financial markets and transactional activity in the UK has been markedly lower this year. This uncertainty will now continue for a number of reasons.
Firstly, the question posed at the referendum decided that the UK should leave the EU, but it did not (and did not have the power to) determine how that exit will occur or the nature of the UK’s relationship with the EU following Brexit. This will be the first time that a significant member of the EU has left and there is no detailed mechanism in the treaties establishing the European Union for a member to exit.
Article 50 of the Treaty on the European Union requires a member state which wants to withdraw from the EU to notify the European Council of its intention to secede. The referendum result in the UK does not constitute such notice and the timing of service of such notice is likely to be a matter of intense political discussion in the UK in the coming weeks or months. Following service of an Article 50 notice, a withdrawal agreement between the UK and the EU will then need to be negotiated. Brexit will occur on the earlier of the date of the UK withdrawal agreement or the second anniversary of the notification to the European Council (unless all remaining member states agree to extend this period).
There is no clarity on the trading arrangements which will apply in respect of the UK after Brexit: as part of the Brexit negotiations, Britain will undoubtedly seek to arrange an appropriate free trade agreement with the EU. However, other European countries which have free trade agreements with the EU have also been required to accept certain fundamental EU principles, such as free movement of workers and, given that immigration into the UK was one of the principal concerns of those in favour of Brexit, it remains to be seen whether a free trade arrangement can be agreed between the UK and the EU. In addition, following Brexit, the UK will be unlikely to benefit from the free trade agreements which the EU has entered into with many countries worldwide and it will need to negotiate new free trade agreements with countries outside the EU.
Accordingly, the precise impact of the Brexit decision on the UK as a place to do business and on the UK legal system will likely take at least two years, perhaps longer, to determine which will only become clearer as the negotiations surrounding Brexit progress.
This client alert contains Paul Hastings’ analysis of the possible impact of Brexit on key areas of UK law which are likely to be of concern to our clients.