Brexit and regulated businesses – next steps

July 11, 2016

Given the UK voters’ decision to leave the EU, questions arise how such a separation will effectively be implemented and what rights of access to the single market the UK will enjoy afterwards. The honest answer is – no one knows. This uncertainty will be part of day-to-day business for the coming months and probably years. But where does this leave businesses that rely on access to the common market, in particular regulated businesses relying on passporting rights? Three options are available:

  • Wait and see approach: what may seem as a reasonable approach until details are known is, however, a risky approach for business.  The infamous Article 50 provides for only two years of negotiation after its trigger to secure an orderly exit.  Should this not happen, there is a risk of an abrupt, automatic exit without a negotiated end-result. This will cut-off regulated businesses from their EEA-markets immediately. Even in case of an orderly exit following which passport rights fall away, requesting licences at the point in time, when this becomes clear, might be too late, as European regulators could be swamped with applications and real estate prices for local presences could have increased substantially.
  • Fully-fledged relocation: not running any risks, the relocation of entire businesses to the EEA might be a costly alternative, including employees, tax, regulatory costs, etc. It may also be unnecessary, as the UK may well keep its access to the single market upon exit.
  • Contingent or stepped approach: businesses may not want to run the risk of a wait and see approach and also consider a full relocation premature and too costly. The golden way lies in the middle. It is possible for regulated entities to start the process of licencing in EEA jurisdictions, such as Ireland, for their services that are most exposed to EEA markets. Running through an approval process for the relevant licence will still cause some costs but could be done on a minimal basis for the absolute core services. Licence extensions to new services in the future may be easier to achieve than a full new licence, in case this would be required.

Specific areas affected:

  • Prospectuses: it is advisable to have prospectuses, as far as possible under existing legislation, approved in EEA jurisdictions outside the UK. Thereby the risk of losing passporting rights will be negligible and it is to be expected that EEA prospectuses will be allowed to be distributed in the UK even after an exit.
  • UCITS funds: Without a negotiated settlement that permits the UK to remain a UCITS domicile, all non-EEA legal entities would need to be re-domiciled and/or re-authorised. It is therefore advisable to start applying for the relevant licences now, no matter whether it is for a “self-managed” fund or a management company (ManCo) appointed by the fund. These funds and/or ManCos can make use of passporting and delegation rights into the UK thereby maintaining most of the current cost structure and can be shifted swiftly once clarity is achieved.
  • AIFs: Third country AIFMs are currently unable to become authorised in order to market to investors within the EEA and must either (a) make use of local private placement regimes, if available or (b) depend on reverse solicitation. In case the UK will only achieve third country status, no passporting rights will be available and even equivalence might not be granted to the UK upon exit but only after a delay. Again here the best option is to apply for licences in an EEA jurisdiction.

This similarly applies to any regulated business such as banks, peer-2-peer lenders, payment providers, insurance companies, brokers and, generally, investment firms.  Directors might be personally liable in case they did not ready their businesses for a UK exit of the EU or if done too late – a risk and cost that should not be borne by individuals.

Kerman & Co. has an experienced team of regulatory, banking and finance as well as capital markets lawyers in its Dublin office. Our team can be of help for all of the above scenarios and provide you with the relevant advice regarding the need to relocate or start the application process for an EEA licence or just do nothing. We work with a host of EEA managers, fund platforms and have long-standing experience in applying for licences as well dealing with Irish and other EEA regulators.

We would be delighted to start the dialogue with you in time to find the best approach for your business and to avoid any bottle-necks, negative surprises and other inconveniences. Please contact Robert Koller on +44 (0)207 539 7266 or robert.koller@kermanco.com for more information.

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