Brexit

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Brexit under the European Passport

The UK’s loss of status as a Member State of the European Union and its non-admission to the European Economic Area (“EEA”) mean that companies having their seat in the UK will no longer be able to use the hitherto available “European passports”[1]. Accordingly, use of outsourcing and insourcing from and to the United Kingdom is certain to become more difficult.

1. Companies

The difficulties will exist initially for companies. Here, relevant European passports enable companies, on the basis of a qualified authorisation in their home country, to operate in all Member States of the EEA subject to only a low level of residual supervision in the respective host country, whether through branches as an expression of freedom of establishment pursuant to Article 49 TFEU, or by way of cross-border services as an expression of the freedom to provide services pursuant to Article 56 TFEU.

These provisions apply on the basis of the directives for insurance undertakings[2], investment services enterprises[3], management companies[4] and credit institutions[5].

From the mid-1990s, driven by the possibilities afforded by the European passports, there was a very strong trend towards transforming subsidiaries having their seat in the respective Member State into branches in precisely these Member States. It was in the context of this trend that the UK, and here above all London, became the centre of the respective activity in Europe for third countries, i.e. the US, India, Canada, Australia and China. At the same time, all institutions having their original headquarters in the UK, such as RBS, Barclays and Standard Chartered, established branches in Europe.

This possibility will cease to exist for companies having their seat in the UK as soon as the country gives up its membership of the European Union.

This will have the following consequences: Companies having their principal establishment in the UK will no longer be able to operate via the European passport and thus will have to either discontinue the activity (case 1), continue their activity as a branch of a third country (case 2), or use a subsidiary in a Member State holding the required authorisation (case 3). If the business is to be continued with the help of the European passport, this means that existing branches of the UK principal establishment would have to be “transformed” into branches of a principal establishment holding an authorisation in another Member State. This may be done during the two-year transitional period e.g. by merging of the existing British principal establishment or at least a business unit previously split off under national law to a principal establishment holding an authorisation in another Member State, namely on the basis of the Merger Directive also implemented in the UK[6].

If no solutions are found for the branches by the time the exit takes effect, these would be regarded, at least in Germany, as branches of a third country which would require an authorisation pursuant to section 32 in conjunction with section 53 of the German Banking Act (Kreditwesengesetz – KWG).

Whether taking up a cross-border activity, i.e. the taking-up of an activity without a physical entity in the host country, will remain possible for companies having their seat in the UK after its exit from the European Union will depend on the respective legislation in the host country. For credit and financial services institutions, for example, German law as a general rule requires a physical presence in Germany[7]. The cross-border activity of an institution from a third country is only possible on the basis of a – rather complex – exemption pursuant to section 2 (4) of the KWG or on the basis of a “reverse solicitation” in which it has to be ensured that the respective customer of an institution approaches the latter and seeks an offer. This concept would be quite unsuitable for systematic market development. On the other hand, all credit institutions having their seat in the UK probably meet the German supervisory standard given that they have so far observed all requirements established by European law.

2. Products

The same considerations apply to the product side for which European passports were also introduced.

UCITS funds[8] and AIFM funds[9], for example, or also insurance policies, may be marketed throughout the EEA solely on the basis of a home country prospectus and a home country authorisation, i.e. on the basis of a European product passport. The same thing applies to other securities whose prospectus could be designed on the basis of the Prospectus Directive implemented in the respective Member States[10].

Here, too, companies having their seat in the UK have hitherto made ample use of these possibilities, albeit subject to a certain restriction since the UK, as a production location for financial products, was and continues to be is engaged in very strong competition with the disproportionately smaller Member States of Luxembourg and Ireland.

The question raised is how the exit from the European Union will impact the admissibility of the distribution of “old products”, i.e. those issued during the UK's membership of the EU. Two approaches are to be considered here: 

  • It would first of all be possible to consider subjecting the “old products” to a mandatory re-application process and to prohibit their further distribution in the event that such re-application should not be completed successfully. This will be a question that either the European Union or the individual Member State to into which the products are to be marketed would have to answer. 
  • Alternatively, a “grandfathering” approach, which is certainly easier for all parties, is also possible. Under this approach, either the European Union, to the extent this falls under its competence, or otherwise the individual Member States would permit financial instruments admissibly issued at the time of the UK’s membership in the EU, to continue to be distributed. The latter could be linked by the respective national legislature e.g. to reporting requirements.

1. With regard to the concept, cf. Haentjens/Gioia-Carabellese, European banking and financial law, London/New York 2015, p. 99 ff; Hanten, ZBB 2000, 245.
2. Directive 2009/138/EC of the European Parliament and of the Council of 25 November 2009 on the taking-up and pursuit of the business of Insurance and Reinsurance (Solvency II), OJ L 335/1.
3. Directive 2004/39/EC of the European Parliament and of the Council of 21 April 2004 on markets and financial instruments amending Council Directives 85/611/EEC and 93/6/EEC and 4. Directive 2000/12/EC of the European Parliament and of the Council and repealing Council Directive 93/22/EEC, OJ L 145/1 (Markets in Financial Instruments Directive – MiFiD); repealed by the as yet not implemented Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU Text with EEA relevance, OJ L 173/349 (Markets in Financial Instruments Directive II – MiFID II).
5. Directive 2014/91/EU of the European Parliament and of the Council of 23 July 2014 amending Directive 2009/65/EC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) as regards depositary functions, remuneration policies and sanctions, OJ L 257/186 (Undertakings for Collective Investments in Transferable Securities Directive V – UCITSD V) and Directive 2011/61/EU of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010, OJ L 174/1 (Alternative Investment Fund Manager Directive – AIFMD).
6. Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC, OJ L 176/338 (here referred to as Capital Requirements Directive – CRD IV). Directive 2005/56/EC of the European Parliament and of the Council of 26 October 2005 on cross-border mergers of limited liability companies from various Member States, OJ L 310/1 (Merger Directive).
7. This at any event has been the view held by the Federal Financial Supervisory Authority (BaFin) since 2005, BaFin Guidance Notice on the licensing requirements for conducting cross-border business of 1 April 2005; this view was also confirmed by the Fidium ruling of the Federal Administrative Court, BVerwG, judgment of 22 April 2009 – BVerwG 8 C 2.09, BVerwGE 133, 358.
8. Cf. section 52 (1) German Investment Code (Kapitalanlagegesetzbuch – KAGB) in conjunction with Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS), OJ No L 302/32 (Undertakings for Collective Investments in Transferable Securities Directive IV – UCITSD IV).
9. Cf. section 57 (1) of the KAGB as well as Article 37 AIFMD.
10. Directive 2010/73/EU of the European Parliament and of the Council of 24 November 2010 amending Directive 2003/71/EC on the prospectus to be published when securities are offered to the public or admitted to trading, and Directive 2004/109/EC on the harmonisation of transparency requirements in relation to information about issues whose securities are admitted to trading on a regular market, OJ L 327/1 (Prospectus Directive).

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