Insurance companies, credit institutions and investment firms licensed in the UK are currently authorised to passport their regulated activities into France. They can provide regulated services either through a branch established in France or on a cross-border basis.
In the event of a so-called “Hard Brexit” and subject to any transitional arrangements, these passporting rights would cease to apply on the date when the UK’s withdrawal from the EU becomes effective. This would mean that UK regulated institutions would no longer be able to service EU customers under existing banking, financial and insurance contracts, which would potentially be damaging to the financial markets in the EU.
With the rejection by the UK House of Commons of the Withdrawal Agreement between the EU and the UK on 15 January 2019 (which provided for a transition period, in which UK firms could continue to benefit from EU passporting rights until the end of 2020), UK regulated institutions are more than ever confronted with the potential consequences of a “Hard Brexit” on their continued access to the EU/EEA financial markets on the basis of the European passport.
In order to prevent difficulties and complications in the functioning and the stability of the banking, financial and insurance markets, the French Government was authorised by the French Parliament to take adequate measures. On 6 February 2019, the French Government adopted an ordinance providing for measures relating to the banking, financial and insurance markets (the “Ordinance”).
This client briefing summarises the main points of the Ordinance, which enter into effect as of the day of the withdrawal of the UK from the EU without an agreement concluded in accordance with Article 50 of the Treaty on European Union.
The Ordinance does not contain any transition period for services/activities passported by UK firms under CRD IV/MiFID II.
It has primarily introduced:
- rules clarifying the legal framework applicable to the performance and the renewal of insurance contracts entered into with UK insurance companies prior to Brexit, with a view to protecting French customers;
- for legal entities established in the EU (each an “EU Entity) which have a master agreement for financial instruments (pursuant to the official report accompanying the Ordinance, these provisions notably apply to ISDA master agreements) in place with a UK credit institution or investment firm, rules regarding deemed acceptance (upon fulfilment of certain conditions, including an offer sent to the EU Entity by the “New Counterparty”, as defined below) by the EU Entity of a new French law master agreement with a credit institution or investment firm from the same group as the UK credit institution or investment firm and being authorized to trade derivatives in the EU (the “New Counterparty”).
- rules allowing temporary eligibility of UK securities and UK funds in the context of the management of collective investments;
- rules regarding payment/settlement systems (pursuant to the official report accompanying the Ordinance, these provisions were meant to ensure that CLS, CHAPS and CREST benefit from the provisions of the Settlement Finality Directive); and
- a clarification regarding the powers of the French regulator in respect of certain third-country firms (i.e. the Ordinance expressly mentions that the ACPR will be competent post-Brexit (i) to sanction violations of French rules committed by the UK-based entities which occurred before Brexit, and (ii) to control compliance with French rules of the contractual obligations arising out of ongoing contracts which have been entered into by UK-based entities before Brexit under the European passport regime).
It is also interesting to note that the official report accompanying the Ordinance indicates that:
“As from the withdrawal of the United Kingdom from the European Union, UK financial institutions will become “third country firms” and will thus lose their “European passport”, i.e. the ability to provide investment services from London to their clients in the European Union. This situation, which is unprecedented, does not raise any particular legal difficulties for the majority of financial contracts. Most investment services must be considered as provided to the client at the time of conclusion of the contract, and accordingly the loss of the passport is not likely to affect its legality or expose the UK institutions concerned for sanctions. On the other hand, the loss of the passport will prevent UK institutions from concluding any new contracts”.
Although most investment services, in accordance with the official report above, would be considered as having been provided at the time of conclusion of the contract, no specific list of investment services has been provided in this regard.
OTC Derivative Contracts
As regards the conclusion of OTC derivative contracts, the service should generally be considered as having been provided at the time of their conclusion so that existing contracts will remain valid, legal and executable until maturity (see Communication from the European Commission on 13 November 2018). However, there are services in relation to these contracts that could trigger a new licence requirement (i.e. certain so-called “life-cycle events” that can be construed in certain jurisdictions as the entering into of new transactions for which a licence in these jurisdictions would be required (e.g. novation, unwinding by entering into an offsetting transaction, exercise of a swaption, etc..). As a result, UK firms may wish to novate their OTC derivative contracts to a New Counterparty (such process being facilitated by the replication of the existing master agreement for the New Counterparty).
As far as the so-called “dealer-to-dealer-exemption” is concerned, the French regulators (the ACPR and the AMF) have recently released guidance on the licence requirements for OTC transactions on financial instruments between (i) French credit institutions authorised to provide investment services or investment firms, when acting on their own account, and (ii) UK credit institutions or investment firms authorised in the UK to provide investment services when acting on their own account. The French regulators have taken the view that, in respect of these transactions, no licence would be required. It has been suggested that this guidance be incorporated into French law.
Asset Management Services
In relation to asset management services, the official impact assessment accompanying the law which authorised the French Government to adopt the Ordinance contained, in particular, the following guidance:
- French clients would still be allowed to hold shares of UK UCITS/AIF post-Brexit:
“In respect of asset management, the withdrawal of the UK will not affect EU investors holding units or shares of UK UCITS or AIF. In the same way, capital calls made by a UK asset manager after the withdrawal of the UK from the EU for units or shares of a UK AIF which have not yet been entirely paid-up at the time of the withdrawal of the UK will not amount to an act of marketing and will thus be legally valid”.
- A UK investment firm would no longer be allowed to provide portfolio management services to French clients post-Brexit:
“Portfolio management, defined as “managing portfolios in accordance with mandates given by a client on a discretionary client-by-client basis where such portfolios include one or more financial instruments” is an investment service which is provided on an ongoing basis throughout the duration of the mandate, because it entails making recurring decisions to buy or sell financial instruments for the entire duration of the mandate. A UK entity to which a mandate is given would find itself, after the withdrawal of the UK from the EU, in breach of the monopoly of investment services providers and would no longer be able to provide this service legally. Once again, a transfer of contracts in anticipation of the withdrawal of the UK appears to be the safest solution”.
Notwithstanding the Ordinance and the official reports, a case-by-case analysis should be conducted for each type of investment service in order to determine whether the UK investment service provider will be able to continue serving existing clients on the basis of contracts already concluded pre-Brexit, and, if that would not be possible, how it can transfer existing contracts to an EU-based entity. It will also be important to note that both the ACPR and the AMF have requested UK entities with a branch office passported in France to provide the authorities with a contingency plan for Brexit.
Legal notice: This material is for general information only and should not be considered as legal advice rendered by the firm.