Banking & Finance
It is generally considered that Brexit will have limited direct impact on existing or new financing transactions which are governed by English law, other than the fact that the Brexit negotiations may generally affect uncertainty and volatility of the financial markets. Brexit is unlikely to affect the enforceability of English law governed finance documents or the choice of English courts where, in addition, contractual continuity may be addressed as part of the exit arrangements. It is also unlikely that Brexit by itself will trigger mandatory prepayment, default or even general MAC provisions (especially given the long lead up to Brexit itself), other than the standard illegality mandatory prepayment event in case the exit arrangements do not preserve the ability of UK financial institutions to lend to EU borrowers, which would be highly unlikely. Brexit should also not affect the substance of the parties’ rights and obligations under finance documents as loan or bond documents are largely unaffected by EU law. Finance documents may include specific provisions that will have to be revised in view of Brexit, such as references to EU legislation, tax provisions or increased cost provisions, but it would be premature to amend these provisions in the meantime or provide specific wording until the exit arrangements get more colour.
Financial services (banks, fund managers and investment service providers)
Whilst the impact will only be known once the EU and UK have negotiated the exit model, there are some key considerations for banks and other financial services providers to take into account. The main question is whether the UK will only leave the EU or if it will leave the European Economic Area altogether (hard brexit). In the latter case, CRDIV does not contemplate a framework for third country access to provide banking activities, which would impose the need for a EU subsidiary for UK based banks in order for them to provide banking services in the remainder of the EU. Similarly, EU banks that wish to provide banking services into the UK may need to establish a UK subsidiary. Under the UCITS regime, Brexit may fundamentally impact UK domiciled UCITS as these will need to be EU domiciled and self-managed or managed by a EU management company. Under the AIFMD regime, the impact is less clear and the outcome of the negotiations will be key. The regulatory structure under MiFID and EMIR enables cross-border access to exchanges, clearing houses and depositaries. If Brexit means that these benefits are no longer available, parties operating UK based trading and clearing venues may need to link-up with EU-based market infrastructure. Summarizing, a hard Brexit will make the UK a third country in the context of, amongst others, banking laws and laws relating to investment services and it will no longer benefit from the passporting regime. The passporting regime allows UK banks, fund managers and investment service providers to do business in the EEA and vice versa.
Prospectus: passport vs equivalence
A hard Brexit would equally mean that UK issuers of securities no longer will be able to passport their prospectuses into Belgium: instead of benefiting from an EEA passport, a UK issuer would have to obtain a prospectus approval within an EEA member state before being able to publicly offer securities in the EEA. By the time Brexit will occur, most probably the new Prospectus Regulation will have fully entered into force (expected in the first half of 2019). The Prospectus Regulation introduces an enhanced equivalence regime for third countries, adding the requirement that EEA member states have to enter into cooperation agreements with third countries who want to be considered ‘equivalent’. If the UK, in accordance with the criteria to be determined by the Commission and ESMA, would become an equivalent country, the access to the EEA might be facilitated, but it remains to be seen at what cost and to which extent.
Loan and bond documentation will not immediately be affected by Brexit. However, we may see some changes to transaction documentation over time, particularly as the exit arrangements take shape and it is sensible to keep the situation under review as events unfold.
Banks, fund managers and investment service providers who want to continue to have access to the UK or to the EEA market will need to develop contingency plans based on a number of possible scenarios, including the position where passporting is no longer available. Financial services businesses will have to assess how much of their business is done in or from the UK relying on the existing passporting regimes. If there is significant reliance on passporting, to what extent could that business be done from another subsidiary within the EU which already has appropriate regulatory approvals? What would the implications be in terms of headcount in that EU subsidiary and the UK? Financial services businesses will need to consider: