Brexit: Regulatory convergence in financial services

Upon withdrawal from the EU, the United Kingdom ("UK") will become a third country under EU internal market regulation. UK financial sector firms will lose passporting rights granted by EU internal market directives allowing for the free provision of financial services throughout the Member States of the EU on a cross-border basis or by creating an establishment.

UK market participants are weighing up their options to maintain access to EU financial markets and may seek to relocate entities, activities or functions to the remaining 27 Member States. In this context, they may want to minimise the transfer of effective performance of functions of activities from the UK by relying on the outsourcing or delegation of certain activities or functions to UK-based entities.

In an Opinion published on 31 May 2017, addressed to the national competent authorities ("NCAs") of the remaining 27 Member States, the European Securities and Markets Authority ("ESMA"), with a view to minimising supervisory arbitrage risks when entities, activities and functions are relocated following the UK’s decision to withdraw, sets out nine principles to foster consistency in relation to their authorisation, supervision and enforcement. In three sector-specific opinions  with respect to investment firms, investment management and secondary markets, published on 13 July 2017, ESMA provides further guidance to NCAs within the specific context of relocations from the UK to the remaining 27 Member States. More details on these documents can be found in the Asset management and investment funds section of our Newsletter.

Further, on 11 July 2017 the European Insurance and Occupational Pensions Authority ("EIOPA") issued similar principles  to foster supervisory convergence and to ensure consistency in the authorisation process related to the relocation of (re)insurance undertakings governed by the Solvency II framework from the UK to the remaining 27 Member States. The principles concern the following subjects: authorisations and approvals, governance and risk management, outsourcing of critical and important activities, on-going supervision and monitoring by the EIOPA.

Finally, on 14 July 2017, the European Banking Authority ("EBA") published final draft regulatory technical standards ("RTS") on the information credit institutions need to provide to competent authorities in the Member States when applying for authorisation, as well as final draft implementing technical standards ("ITS") containing the templates to be used for such submissions. The EBA explains that the RTS aim at promoting a prudent common approach for the licensing of banking activities in the EU and support a level playing field by harmonising the information required to ensure compliance with the Capital Requirements Directive ("CRD"), notably regarding the programme of operations and structural organisation, initial capital, effective direction and the place of business of applicants. The EBA encourages the European Commission to adopt the RTS and ITS as soon as possible to support the rigorous review of applications by banks seeking to relocate in the context of Brexit.