The United Kingdom ("UK") is expected to leave the European Union ("EU") on 29 March 2019. As that date approaches, and although an extension of the deadline is possible, many initiatives have been taken in an attempt to prevent the consequences of a hard Brexit, which would result in the United Kingdom becoming a third country (outside the EU), without agreement to ensure a smooth transition. The financial authorities as well as the Belgian and European legislators are taking various measures to clarify the likely effects of Brexit, in particular with regard to financial institutions. These initiatives include the FSMA Communication of 21 February 2019 regarding some consequences for investment firms in the event of a hard Brexit, the draft act of 19 February 2019 on the withdrawal of the United Kingdom from the European Union, a Memorandum of Understanding between the ESMA and the Bank of England, and communications from the European Commission on Brexit preparations.
Third-country financial institutions
Today, investment firms and other regulated companies under UK law (insurance and reinsurance firms, credit institutions, investment firms, brokerage firms, UCITS and AIF managers, payment service providers, electronic money firms, etc.) benefit from a European passport. This passport allows them to provide their services throughout the European Economic Area ("EEA").
After Brexit, the United Kingdom will become a "third country" with respect to the EEA. If no action is taken, regulated companies that were only authorised in the United Kingdom will be subject, within the EEA, to the EEA obligations applicable to regulated companies governed by the law of a third country. There are three main possible ways for these companies to operate in the EEA and in Belgium in particular. However, it will be important to examine, for each specific scheme, which rules apply in Belgium for companies regulated by the law of a third country.
Solutions for investment firms
Investment firms in the United Kingdom (brokerage firms, portfolio management and investment advisory companies) may set up a subsidiary in Belgium or in another EEA Member State. The subsidiary must then first obtain a licence for the financial services it intends to provide. The subsidiary will benefit from the European passport and will therefore be able to operate in all EEA countries.
Investment firms in the United Kingdom could consider setting up a branch in Belgium or in another EEA Member State. This branch must obtain a licence – which will allow it to provide services only in the country where it has obtained that licence.
- Investment firms in the United Kingdom could continue to provide services in Belgium subject to prior notification to the FSMA. However, in the context of this prior notification, regulated companies in a third country may not provide their services to retail customers but only to professional customers, eligible counterparties or to some categories of expatriates.
In principle, the loss of a European passport in the EEA will not have consequences for contracts that have already been entered into. However, the FSMA points out that the execution of some contracts with continuous performance could be problematic. An investment firm governed by UK law which is no longer authorised to pursue its activity in the EEA (or is only authorised to operate in certain Member States) would therefore no longer be able to engage in new investment activities or to offer or provide new investment services anywhere (or anywhere else) in the EEA.
No initiative so far has specified the consequences of such a prohibition for continuous financial services contracts (such as for discretionary asset management). The execution of such contracts will generally involve the provision of investment services and may therefore no longer be possible after Brexit. The question as to the continuity of these contracts also arises for OTC derivative contracts. In each case, it should be examined to what extent a transaction pursuant to a concluded contract or a modification of the contract on the occasion of a contract life cycle event constitutes a new provision of an agreed investment service, for which a new licence will be necessary (or a simple notification, as the case may be).
The draft act introduced in the Belgian Parliament on 19 February 2019 on the withdrawal of the United Kingdom from the European Union empowers the King, upon the advice of the FSMA and the NBB, to take the necessary measures to safeguard the performance in Belgium of contracts entered into prior to a regulated firm losing its licence. These measures are designed to avoid uncertainty regarding the execution of existing contracts, while regulated companies are invited to ensure the continuity of their services.
In terms of data protection rules, regulated companies operating in a third country but holding data of European citizens must comply with specific obligations set out in the GDPR. In particular, regulated companies in the United Kingdom will have to have a representative responsible for data protection in the EEA. The transfer of data from the EEA to the United Kingdom, even within the same group, will be subject to certain conditions (for more information, consult Eubelius Spotlights March 2018).