This is the fourth in our series of "Brexit Bites" which focuses on Financial Services.

Introduction

Much of the regulation of financial services in the UK is governed by EU law. This includes the regulation of banks, broker-dealers, insurers and reinsurers, insurance intermediaries, fund managers, mortgage providers and intermediaries, e-money issuers and payment service providers. Therefore, a Brexit would mean that financial institutions with operations crossing UK and EU borders would become subject to a new regulatory regime. The precise implications of a Brexit will depend on a variety of factors, including the arrangements that the UK implements to govern cross-border business between the UK and the remaining countries of the EU and the extent to which the UK government chooses to retain legislation that is based upon EU law. It seems unlikely that Britain leaving the EU would result in a reduced regulatory burden for firms, since many forms of regulation have been initiated in Britain and subsequently adopted into EU legislation. On the contrary, one impact of a Brexit could be an increased regulatory burden for firms operating in both the UK and EU who potentially would need to comply with new UK regulations in addition to EU law.

Passporting Regime

An important element of the EU financial services regime is "passporting". Passporting is the exercise of the right by firms authorised under an applicable EU financial services directive to carry on activities in another EEA member state, on the basis of their home state authorisation. Their activities can be conducted through a branch in the host member state or on a cross-border services basis.

Many firms have adopted a business model based upon passporting to conduct their EU-wide operations. Should a Brexit result in the passporting regimes ceasing to apply in relation to business conducted into and out of the UK, firms in the UK and the remaining EU would need to consider whether to operate distinct authorised entities in both the UK and EU, particularly as the regulators in some EU countries may only accept applications for authorisation from locally incorporated entities.

Some non-EU financial institutions, which have established subsidiaries in the UK as a base from which to passport into the EU, might need to consider whether to move their base elsewhere, whilst potentially also maintaining their UK entity. However, much will depend on the extent to which arrangements can be implemented to replicate passporting between the UK and EU, including whether the UK will be part of the EEA and able to participate in the arrangements that facilitate the cross-border provision of financial services between EEA member states.

Likely Implications of a Brexit on the Financial Services Sector

Apart from strategic implications for the structure of EU business operations, a Brexit would trigger a host of practical implications for how financial institutions operate their businesses. For instance, where financial institutions distribute their products in the UK and elsewhere in the EU, they would need to review product terms, distribution agreements and marketing literature to consider whether these need to be amended or replaced as a result of a potential regulatory separation. Furthermore, firms that raise capital on a pan-European basis would need to consider the implications for their prospectuses and their ability to market securities under a new regulatory regime.