Britain’s Prime Minister, Boris Johnson, secured victory in the December 2019 general election with a promise to “get Brexit done.” The UK duly left the European Union (EU) on 31 January, 2020, and the UK and the EU have entered a ‘transition period’ designed to maintain the regulatory status quo between the UK and the EU until the end of 2020. But what does this mean in practice?
1. What is the transition period?
Referred to as the ‘implementation period’ by the UK government and UK regulators, the transition period1 is a period of time being used to bridge the gap between the UK’s withdrawal from the EU and the date on which agreement regarding the future relationship between the UK and the EU enters into force (or the UK’s future relationship under a “no deal” scenario commences). The transition period is due to end at 11 p.m. GMT on 31 December, 2020. Before 1 July, 2020, the joint UK-EU committee, which was established under the Withdrawal Agreement,2 may adopt a decision to extend the transition period for up to two years. While possible, such an extension is unlikely given the UK government's stated policy to not seek an extension.
2. Does EU law still apply even though the UK has left the EU?
Yes. During the transition period:
- EU law continues to be applicable to and in the UK;3
- EU institutions, bodies, offices and agencies retain the powers conferred upon them by EU law in relation to the UK and natural and legal persons residing or established in the UK;4 and
- The Court of Justice of the EU (ECJ) retains jurisdiction5 as provided for in the Treaties.6
The UK will continue to be treated as part of the EU’s single market in financial services – meaning that access to EU/UK markets will continue on current terms and that businesses, including financial services firms, will be able to trade on the same terms and with the same rights and protections as before the withdrawal until 31 December, 2020.7
3. Will new EU legislation affect the UK in the Transition Period?
Yes. Directly applicable EU legislation (i.e., EU regulations) that comes into effect during the transition period will apply directly in the UK and to UK firms. Where EU directives, which are not self-implementing and need to be transposed into national laws, take effect during the transition period, the UK government and regulators will work to implement those EU directives as if the UK were still an EU member state.
4. Will passporting still apply in the Transition Period?
Yes. Passporting rights continue to apply during the transition period,8 meaning that UK firms accessing EU markets, and EU firms accessing UK markets, can continue to rely on passporting rights – just as they did prior to 31 January, 2020.
5. What is happening with regards to the UK Temporary Permissions Regime (TPR)?
The FCA has indicated that the TPR will now take effect at the end of the transition period. The window for firms and fund managers to notify the FCA that they want to use the TPR is currently closed. Firms and fund managers that have already submitted a notification need take no further action at this stage. The FCA plans to re-open the notification window later this year, which will allow additional notifications to be made by firms and fund managers before the end of the transition period. The FCA has indicated that there will also be an opportunity for fund managers to update their previously submitted notifications, if necessary.
6. What happens at the end of the transition period?
The UK and EU are working to conclude a free trade agreement (FTA) covering financial services (along with other areas) before 31 December, 2020. There is recognition that this is ambitious, and it remains to be seen whether an FTA that covers both goods and services can be agreed before the end of the transition period.
If the EU and the UK are unable to reach an agreement on financial services by 11 p.m. on 31 December, 2020, then the issues facing financial services firms are the same as those faced on a “no-deal” Brexit.
7. Is “equivalence” now likely, meaning that Brexit plans can be put on hold?
Equivalence is the concept in certain financial services directives that the regulatory or supervisory regime of a third country relating to a particular sector is of an equivalent standard to that which applies under EU law. Although the UK became a third country from 31 January, 2020, the effect of EU law continuing to apply in the UK for now means that the issue of equivalence does not arise as a practical issue until the end of the transition period. Proposed UK legislation applicable at the end of the transition period would incorporate EU directives into UK law and would retain the concept of potential equivalence for non-UK countries accessing financial services markets. The Political Declaration setting out the framework for the future relationship between the EU and the UK states that the UK and the EU should endeavour to conclude these equivalence assessments before the end of June 2020.
As to the possibilities of equivalence decisions being granted to the UK at the end of the transition period, the present rhetoric from the EU Brexit negotiators indicates that this is unlikely. In designing their post-transition period business plans firms should be wary of relying on the possibility of any equivalence decisions from the EU, not only because they are unlikely to be granted but also because a finding of equivalence can be withdrawn at any time, unilaterally by the EU with no obligation on the part of the EU to give firms adequate notice to adapt their regimes.
8. What is the status of the non-UK transitional regimes?
Following the UK’s withdrawal from the EU, there has been little information from the EU 27 Member States in relation to the transition period. As EU law continues to apply to and in the UK until 31 December, 2020, it seems that the EU 27 are proceeding on a ‘business as usual’ basis.
When preparing for a “no deal” Brexit, there was no uniform approach adopted by the remaining EU 27 Member States. Some Member States took steps to address the so called ‘cliff edge’ effect of leaving the EU without a deal, but those measures varied. Addressing two Member State approaches:
Luxembourg – when a “no deal” Brexit seemed likely, Luxembourg adopted Brexit Laws to ensure that investment firms, AIFMs and UCITS management companies established in the UK could continue to provide their services to Luxembourg clients, AIFs and UCITS, provided that the UK firms made a notification filing with the Commission de Surveillance du Secteur Financier (CSSF). On 31 January, 2020, the CSSF confirmed that all decisions and notifications made pursuant to that regime would lapse with immediate effect. At the time of this writing, no further detail nor communications have been provided by the CSSF but the CSSF has stated that it will continue to communicate on Brexit-related issues in the course of the transition period as necessary.
Ireland – Ireland adopted a similar approach to Luxembourg to deal with a “no deal” Brexit, but without the time limitations and without specifying that the UK’s exit had to be a “no deal” basis. Specifically, the Central Bank of Ireland (CBI) stated that an Irish Qualifying Investor AIF (QIAIF) would be permitted to designate a UK AIFM as its AIFM following the UK’s exit from the EU, provided that the QIAIF and its UK AIFM notified the CBI of the same and updated the AIF’s documentation accordingly and complied with all relevant provisions of the AIF Rulebook.
Following the withdrawal of the UK from the EU, the CBI has not amended this statement and the understanding is that the provisions set out above will come into effect following the end of the transition period. No further information has been forthcoming from the CBI with regards to the notification process.
In the absence of (i) an FTA that includes detailed provisions relating to financial services being agreed by 11 p.m. on 31 December, 2020, (ii) an extension to the transition period beyond 31 December, 2020 and/or (iii) equivalence decisions being agreed by EU and UK, it remains to be seen what measures the individual EU 27 Member States will take and if they will proceed with re-introducing those measures that they had in place in preparation for a “no deal” Brexit.
Firms should generally continue to monitor the status of ongoing discussions between the UK and the EU. Dechert will provide periodic updates, including on the effect of these discussions on financial services.
Footnotes
