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Banking & Finance

Checklist

Banking

Choice of jurisdiction clauses and recognition of judgments of UK courts - uncertainty as to whether they will continue to be effective as between the UK and EU jurisdictions’ courts

There should be minimal impact in relation to choice of English governing law provisions. What the position will be in relation to contractual choice of jurisdiction is more unclear until the results of negotiations are known. However, there are several international conventions to which the UK is or could become a signatory which would alleviate the uncertainty. Alternatively, parties may want to consider opting for international arbitration, which would negate enforcement-related issues precipitated by Brexit.

Bail-in clause to comply with Article 55 of the EU Bank Resolution and Recovery Directive to be inserted into English law governed finance documents if the UK is not part of the European Economic Area

Finance parties may require immediate amendment of finance documents since a lack of bail-in clause will make debt participations less attractive to EEA lenders if there is no bail-in clause. However, whether this Article 55 requirement will be triggered in relation to the UK remains to be seen and is subject to the UK’s position on departure of the EU.

Possible activation of increased costs provisions in finance documentation

Lenders may seek to recover costs incurred if compliance with UK and EU regulation imposes additional costs.

Information requirement (Prospectus Directive/ Transparency Directive)

Unless special arrangements are made between the EU and the UK, it would no longer be possible to use a securities prospectus approved by a competent UK authority within the EEA without separate authorisation issued for third countries, and vice versa.

Market infrastructure for trading in financial products

Unless special arrangements are made between the EU and the UK, RMs, MTFs and OTFs from the UK may no longer be able to grant EEA trading partners access to their trading platform without special regulatory authorisation (third-country passport). Conversely, trading platforms authorised within the EEA could no longer grant access to trading partners from the UK without authorisation from the UK regulatory authority.

Central counterparties ("CCPs")

Unless special arrangements are made between the EU and the UK, UK-based CCPs will no longer be able to clear and settle trading transactions from Member States without separate authorisation. In particular, trading platforms from the EEA (e.g. stock exchanges) could no longer access UK-based CCPs (London Clearing House) without special arrangements being made. Similarly, CCPs authorised within the EEA could no longer access clearing partners from the UK without authorisation from the UK regulator.

Financial Services

If the UK is to leave the EU and the single market, how will UK/EEA cross-border business be regulated and what is the timetable?

Political uncertainty remains and nothing is yet agreed. The EU/UK negotiations are only now turning to the framework for the new treaty on trade. The current negotiations envisage a Withdrawal Agreement, which would maintain the single market cross-border regime until 31 December 2020. At that point, the extensive single market mutual recognition/DRC arrangements between the UK and the rest of the EU/EEA (such as passporting) would fall away. It seems that any new DRC/mutual recognition will be more limited in scope and scale and on a different legal basis. There is no consensus, however, on any such measures; indeed the EU has not so far agreed to go beyond the limited mutual recognition/DRC under its existing third country equivalence provisions.

UK authorisation ceases to be valid in rest of EU/EEA and authorisation in EU/EEA states ceases to be valid in the UK.

Loss of single market mutual recognition would include the end of passporting for firms and funds and bring to an end many other DRC arrangements for cross border business. This would impact both EU/EEA business with the UK and UK business with the EU/EEA. Groups are now working on more detailed planning and implementation for the regulatory restructuring of cross-border business including (i) establishing and applying for authorisation for new EU/UK entities, (ii) switching cross-border business to subsidiaries on the other side of the UK/EU border, (iii) obtaining local authorisation for foreign branches (when this is possible) (iv) restructuring services business which will become prohibited under local perimeter rules. Longer lead-time items include new licences. Re-documentation, e.g. of client and other relationships, comes later.

Critical issues for the structuring of cross-border business in the absence of single market DRC/mutual recognition

New structures may depend on the extent to which groups can rely on techniques such as fronting, reverse solicitation, intra-group outsourcing/ support and transaction booking, and the differing local member state perimeter regimes. Regulators have been publishing guidance on various issues relevant to Brexit restructuring including ESA guidance on the restrictions and limitations that will apply.

Without single market DRC, some current modes of supply for UK/EEA cross border business will be prohibited.

Some modes of supply cannot be continued, even by obtaining local authorisation. Services business may be prohibited and require local delivery/establishment; other business (such as retail deposit taking) may require a local subsidiary because use of a local branch may be prohibited.

Transactions and other contracts

The Brexit changes to the current legal regime will impact the terms and effect of contracts and transactions. There will be broadly based review of standard documentation – both precedents and industry standards such as ISDAs. Firms and lawyers will need to be alert when dealing with contracts and transactions whilst uncertainty persists. Regulators are now alive to these issues - for example in relation to longer-term contracts and transactions such as derivatives and insurance policies - and have been pressing for legal measures.

Central counterparties ("CCPs")

Unless special arrangements are made between the EU and the UK, UK-based CCPs will no longer be able to clear and settle trading transactions from Member States without separate authorisation. In particular, trading platforms from the EEA (e.g. stock exchanges) could no longer access UK-based CCPs (London Clearing House) without special arrangements being made. Similarly, CCPs authorised within the EEA could no longer access clearing partners from the UK without authorisation from the UK regulator.

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