Brexit — life punishes those who come too late

Transcription

1. IFN SECTOR CORRESPONDENT Brexit — life punishes those who come too late L AW By Dr Nicolas Bremer The cacophony of media coverage concerning the UK’s exit from the EU has been ringing in the ears of every player in the financial sector for years now. This deluge of doomsday news appears to have created a fantastically diminished response: instead of preparing for the impending sea change in financial markets, many banking professionals from the Middle East are shrugging it off. As a lawyer, I find the risks in ignoring Brexit alarming. It is not the abstract notion I have heard some bankers say they believe it to be. Brexit will bring with it the most drastic changes to financial industries and markets in Europe in decades. As of the 1st February 2020 — or a later date should the embarrassing cycle of Brexit postponement continue — London will be an offshore marketplace. This means UK-licensed financial institutions will be extremely limited when dealing with continental Europe. Brexit will bring with it the most drastic changes Currently, UK-licensed financial firms profit from so-called passporting. This allows firms licensed in one member state of the European Economic Area (EEA: EU plus Norway, Luxembourg and Ireland) to do business in all other EEA countries without requiring additional domestic authorization. Financial products approved in one EEA state can be offered throughout the EEA. Thus, by acquiring a banking license in the UK and procuring approval for their financial products there, non-European banks are able to access the whole EEA market. After Brexit, passporting will no longer © apply to UK-licensed firms. To ensure continued access to the EEA market, they will have to procure a full banking license in one of the remaining EEA states. Thus, non-European banks that choose to set up in London to access the EEA market will have to establish a fully licensed representation in one of the remaining EEA countries to continue to do so. This does not mean that they should or must abandon London altogether. London will remain an important financial center and UK-licensed firms will be able to offer some services to the EEA market after Brexit. However, large parts of their business will require licensing in an EEA jurisdiction. This will be a challenge for the Islamic finance industry in particular. Over the past years, England and Wales have taken considerable steps to accommodate Islamic banks by developing a regulatory regime that considers the particular requirements of the Islamic finance sector. These efforts helped to establish London as the principle hub for the Islamic finance industry in Europe. But the continent has been catching up. For instance, in 2015, the Central Bank of Germany licensed the first Islamic bank in the eurozone, and German courts recently abolished hurdles for Islamic financing models in real estate transactions posed by German tax law (see IFN Vol 16 Issue 27, p 20). Thus, while change is never without obstacles, Islamic finance institutions will find accommodating regulators on the continent. So what should financial institutions, be they Islamic or conventional, servicing the EEA market through a UK-licensed entity do? Ideally, they should meticulously assess which parts of their EEA business will be hindered or outright prohibited after Brexit. Since we do not know how ‘hard’ of a Brexit we will ultimately see, and since the current deal being discussed does not include provisions 23 governing the financial sector, such an assessment currently can only be based on educated assumptions. The resulting ambiguity appears to cause some institutions to take a wait-and-see approach, grasping to the hope that business can go on as usual. This is a dangerous delusion. Large parts of the business in the EEA and with EEAbased customers currently conducted from London will not be permissible after Brexit. Thus, the question every financial institution must ask itself is what is more expensive: waiting and losing (part of) their business in the EEA or setting up now and possibly moving more operations to the continent than they ultimately would have to? The big players have already made it clear what they are thinking: setting up on the continent is the way to go. Over 30 firms have chosen Frankfurt as their new EU headquarters; giants like JPMorgan, Goldman Sachs and Morgan Stanley are expanding engagement in the German financial center, bringing an estimated EUR750 billion in managed assets to Frankfurt from London. Bank of America and Citi Group are significantly expanding their representations in Paris and other players are shifting operations to Dublin, Luxembourg and Amsterdam. EEA legislators have granted UKlicensed financial institutions a grace period until December 2020. Since acquiring a banking license in continental European jurisdictions will, in our experience, take about six months, firms cannot afford to wait — just like Mikhail Gorbachev’s words of warning to Erich Honecker in the wake of the fall of the Berlin Wall which are typically misquoted: “Life punishes those who come too late”. Now as old borders in Europe reemerge, the financial industry would be well advised to heed this premonition. Dr Nicolas Bremer is a partner at Alexander & Partner. He can be contacted at nb@alexander-partner.com. 4th December 2019