Back-Branching

The withdrawal of Great Britain (“UK”) from the European Union (“EU”) on 31 January 2020 is the first application of Article 50 Treaty on European Union (“TEU”) and thus a political and European legal novelty and an object lesson for dealing with the withdrawal of a European Economic Area (“EEA”) Member State. While the political negotiations on the exit modes were mainly concerned with the border between Ireland and Northern Ireland, the retention of residence rights and the future modalities of the movement of goods, the financial sector played a subordinate role. This is particularly evident in the Brexit withdrawal agreement between the UK and the EU. It does not make a single explicit statement on the structure of the relationship between the EU and UK in financial services in a post-Brexit environment. From a prudential point of view, Brexit is a culmination point for all questions of third country access to the EEA. How should credit institutions from the UK - now a third country - be granted access to the EEA and vice versa? How can it be ensured that, with regard to market access from the UK to the EEA, each Member State acts in a convergent manner and no arbitrage effects arise? How can the regulators improve convergence in the EEA given the different supervision in the participating member states under Article 17 of the Single Supervisory Mechanism (“SSM”) and those that do not participate? To what extent can tasks be outsourced to the UK? Can the concept of ‘reverse solicitation’, i.e. the use of the (passive) freedom to provide services under Article 57 et seq. of the Treaty on the Functioning of the European Union (“TFEU”), improve cross-border activities? How can customer relationships, i.e. contracts as well as assets and liabilities, be transferred if the registered offices relocate from the UK into the EEA? All these questions of third country access become particularly relevant in the Brexit context because, as a consequence of the withdrawal of UK from the EEA, the advantages of the European passport regime are no longer applicable. The European passport regime is required and specified under European law by Article 33 et seq. of Capital Requirements Directive IV/V (“CRD IV/V”) and Article 34 et seq. of the Markets in Financial Instruments Directive II (“MiFID II”). It allows credit institutions to provide supervised banking and financial services into other Member States on the basis of the licence granted by their home state without the need of an additional licence granted by the host state. In this respect, the European passport can be regarded as a legally prescribed equivalence, underlying all relations of the Member States relevant to financial supervision. Previously, however, the EU legal framework restricted provisions on third country branches (“TCBs”) to one general principle only, cf. Article 47(1) CRD: Member States must not be subject to TCB provisions, which result in a more favourable treatment than that accorded to European passport branches. The draft CRD VI published in October 2021 in the context of the Banking Package 2021 for the implementation of the Basel III standards shows, however, that the regulation of TCBs will also be subject to much stricter control and harmonisation in the near future.

The Working Paper deals with a specific scenario of third country access, which is caught between the conflicting regimes of the European passport and individual national regulations of third country access: back-branching.

The following observations will be limited to the practice-relevant activities of the credit institutions determined by Capital Requirements Directive (“CRD”) and Capital Requirements Regulation (“CRR”). In contrast, the European passport and the third country access modalities under the MiFID II, Undertakings for Collective Investment in Transferable Securities (“UCITS”), Alternative Investment Fund Managers Directive (“AIFMD”), Solvency II or Payment Services Directive II (“PSD II”) provisions will not be considered more closely. This limitation was necessary, as all Directives take a completely different approach to third country access modalities. This ranges from a definite and fully harmonised concept, e.g. the AIFMD, to concepts which are completely silent on the third country access, e.g. PSD II. Furthermore, due to the UK’s European legal heritage, the current supervisory situation in the UK might still be regarded as equivalent to the legal situation in the EEA. Nevertheless, the following explanations assume that it will not be possible to reach special equivalence agreements between the UK and the EU or individual Member States any time soon that deal separately with the operation of banking business and the provision of financial services. There is nothing to indicate that such equivalence agreements will be concluded in the near future between the UK and the EU or individual Member States, as the withdrawal agreement, among other things, makes clear. The fact that the closing of such agreements is complex is shown, for example, by the fact that neither the General Agreement on Trades in Services (“GATS”) nor the Agreement on the Free Movement of Persons between the Swiss Confederation and the European Union contains regulations on ‘financial services’. In addition, experience suggests that the British supervisory authority could go back to a ‘light touch’ approach to optimise market access, for which the Financial Conduct Authority was known and appreciated before the financial crisis. The EU and the UK have at least agreed in a joint statement to develop a framework for cooperation on supervisory issues. This is intended to enable transparency and a joint dialogue in the process relating to the issuance, suspension or withdrawal of equivalence decisions, as well as a constant exchange in relation to supervisory initiatives. But while the joint statement on supervisory cooperation is intended to lay the foundation for a more stable equivalence process, defining the framework would still require further negotiations. The outcome is therefore uncertain at this time, and the current stage reached cannot serve as a robust basis for the provision of banking services between the UK and the EEA.