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Brexit Brexit - Need to know

How could a no-deal Brexit impact financial services?

22 Oct 2019

As one of the most highly regulated industries in the UK, financial services is arguably one of the sectors that has been under the most pressure to put contingency plans into action and prepare for no-deal. What should businesses in this sector consider when engaging in contingency planning? Dan Turnbull, Head of Regulatory Affairs at City of London Corporation, outlines what organisations need to be aware of as they prepare.

Passporting

Under a no-deal outcome, UK-based firms will lose authorisation to operate in any EU member state as they did previously through passporting - where a ‘passport’ in one Member State allowed them to provide services across the whole of the EU.

Equivalence

There was speculation that businesses providing financial services could be granted equivalence, which would mean they were recognised under EU standards and regulatory regimes. However if the UK leaves without a deal there will be no time for assessments to be made and it will be treated as a third country by the EU. Therefore, many firms have already assumed equivalence wouldn’t be granted and have relocated to ensure that, in the event of no-deal, they can continue to function.

What are the things that businesses restructuring in the EU should know?

  • EU regulators have stipulated that subsidiaries can’t be mere ‘brass plate’ companies – for firms to provide services and have more access to the market in any specific EU country, they have to move more of their capital and liquidity to support that subsidiary. This can’t be done from the UK. 
  • Experts estimate that the splitting of capital and liquidity between the EU and UK could result in an annual cost of €60 bn to financial services by 2030, if there isn’t a deal.However, this figure could be reduced if a deal is negotiated between the EU and UK. 
  • An estimated 10% of UK assets have already been moved from the UK into EU – any tax associated with those assets will be paid in Europe, rather than UK.This could result in a huge shortfall in funds for the HMRC that could impact the UK economy.

Data, tax and VAT, migration and visa issues

Again, as a highly regulated industry, many firms have been forced to face and prepare for these issues early on.

  • The EU generally has strict conditions for allowing the personal data of EU/EEA nationals to be transferred to other countries.In the event of no-deal the UK will leave the EU data protection board, which means it no longer has access to common market data and will have to comply as a third party. Many businesses have established data centres in the EU to help facilitate continued data transfers into the UK. The Information Commissioners Office (ICO) have also issued appropriate safeguards. 
  • UK finance and corporate tax specialists have warned that there are potential tax implications and regulatory problems for businesses who set up a subsidiary outside of the UK to carry out their services. Businesses need to consider how they present the restructuring of their business to HMRC and identify any potential unexpected tax regulatory problems that could occur from running their operations in a different EU country.
  • Financial services firms often have a highly mobile international workforce and are reliant on their ability to move freely within the EU. The UK is expected to introduce a new immigration regime from January 2021 for all EU nationals arriving in the UK after this date. The majority of businesses in financial services have already considered how their organisation relies on physical movement of people and are checking the immigration policies in each specific country as they differ substantially.

The immediate effect of no-deal will involve potentially difficult and drawn-out negotiations between UK businesses and regulators, focused around the policies and regulations they’re required to have in place for their services to continue operating. Businesses can’t expect increased market access to the EU over and above other third countries or any immediate equivalence decisions.

Businesses in the financial services sector are mostly in the advanced stages of or in active deployment in regards to no-deal planning. It is therefore vital that you consider what you and your business can do to prepare for this outcome.


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