QuickTake: continued potential for confusion as opposed to a coordinated approach? 

On February 28, 2019, our Eurozone Hub published a Client Alert highlighting that, with the EU continuing to play its own Brexit “emergency” legislative cards close to its chest, various EU-27 Member States had begun stepping up national efforts. Some of these efforts have included publication of principles and/or concrete draft proposals for “National Emergency Brexit Legislation” (NEBLs) which provide temporary emergency powers with narrowly defined fields of application.

This revised Client Alert on developments in key EU-27 jurisdictions reflects that, even if the original March 29, 2019 exit date is moved to the earlier of either April 12, 2019 or May 22, 2019 (each an Exit Date), the revised date itself dependent on whether the EU-UK Withdrawal Agreement is ratified by the UK’s House of Commons or not, the fact that individual states have begun to prepare unilateral and often uncoordinated measures could actually lead to more confusion in the interim until/unless the EU Commission acts and does so swiftly. 

With German legislative policymakers being first out the door in advancing two NEBL instruments through its parliamentary process, other Member States, notably France, Spain, Italy and the Netherlands have been quick to advance their own efforts. Additionally, Ireland has proposed its own “Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Bill 2019¹ into the Irish legislative process.² These NEBL instruments remain important even where the UK has taken to renewed voting on very different potential Brexit outcomes. 

This Client Alert looks at the impact on financial services and market participants from the various stages of developments on March 27, 2019, the likely outlook ahead, common themes amongst the NEBLs from the relevant Member States and indicates where gaps exist.  Over the longer term, the NEBLs could however pose a set-back to EU efforts. This includes NEBLs being a barrier to aims of both completing the Banking Union and Capital Markets Union, so EU-level action could also occur to put an end to temporary measures. Such EU-level action is potentially necessary to assist, in particular affected firms, market operators and market participants to transition fully to the new “new normal” of their post-Brexit operations regardless of whether they are in the Eurozone, the EU and/or European Economic Area in a more harmonized fashion than the NEBLs currently aim to provide for. 

Timing remains key

National Member States’ actions have focused on similar measures. These include:

1. Proposing unilateral transition periods (up to 21 months – or in the case of Spain – up to nine months or Italy, on the shorter end – six months) for financial services; and/or
2. taking a leaf out of the UK’s own unilateral proposals for a “temporary permissions regime” (TPR) that permits incoming firms to continue operations during the transition period on the basis of what would be their “expired” and thus “over stamped” passports, allowing firms to continue on the basis of temporary waivers, exemption orders or other recognition with or without mutual recognition by the UK’s authorities; or
3. In certain Member States granting wide-reaching powers, often to national (as opposed to EU) authorities, to designate and/or recognize access to financial market infrastructure systems and/or trading venues in the UK which would ordinarily require an evaluation conducted at EU level. 

It should be noted that in some jurisdictions the national TPRs could run conceptually at a different (longer or shorter) period than the December 31, 2020 longstop date that is set in Art. 126 of the EU-UK Withdrawal Agreement (unless that EU level transition period itself is extended to the end of 2022 at the latest).  The individual NEBLs are all originally drafted as entering into force on or around the original Exit Date (March 29, 2019) as opposed to any of the later/revised Exit Dates.

TPRs and intra-institutional challenges across the EU-27

The national TPRs are generally aimed at giving UK firms time to amend their operations to comply fully with the new reality of being what the EU considers a third-country firm. They thus aim to act as a cushion for any negative impact for the EU-27 as opposed to providing a safe-harbor for the otherwise hard-landing that UK firms ought to have prepared for. As a result, they are expected to provide less market access than the EU passporting regime currently in place ahead of Brexit. In contrast to the UK, EU-27 NEBLs that incorporate the concept of a TPR do not generally permit the firm wishing to benefit from the TPR to make an application, rather a TPR is granted to the whole market or specific firms at the initiative of the relevant supervisor. 

Equally, in some jurisdictions the NEBLs purport to grant decision-making authority to nationally competent authorities (NCAs). This however is an issue given that in a number of instances the ultimate decision-makers are located at EU-level. This goes against much of the hierarchy that is present in EU-level existing legislation and/or the breadth of Supervisory Principles on Relocations (SPoRs)³ published steadily by the European Central Bank (ECB) in its Single Supervisory Mechanism (SSM) lead in the Eurozone’s Banking Union or that of the European Supervisory Authorities (ESAs). This presents a possibility of inter-institutional conflict and could lead to confusion. 

While this is a frustrating reality, and one that is not new, market participants will need to remain watchful and retain counsel to help navigate the various measures and chart an optimal course on compliance, including if the EU passes its own legislative measures that reduces this fragmentation and/or plugs gaps.  These considerations remain important even in the event that the EU and the UK do manage to achieve consensus on the existing Withdrawal Agreement and an EU-wide transition period comes into effect—during which time EU and UK policymakers have pledged to progress a permanent arrangement on the future relationship of financial services.

1. Brexit-related legislative developments in Germany

On Thursday, February 21, 2019, the German parliament, the Bundestag, and on March 15, 2019 the Bundesrat, voted to adopt two bills that provide additional certainty in the event of a No-Deal Brexit as well as a Hard-Brexit.⁴ For financial services, the most recent set of national measures are contained in the (confusingly named) law “on tax and other provisions to accompany the withdrawal of the UK from the European Union” (Brexit-Steuerbegleitgesetz i.e. the German Brexit Tax Accompanying Act - or the Brexit-StBG) that makes amendments to 14+ laws and ordinances and which was published in the Federal Gazette on March 28, 2019.⁵ The Brexit-StBG enters into force on March 29, 2019 regardless of the UK’s Exit Date potentially having shifted (but that fact possibly not being, at the time of writing, reflected in primary UK legislation). 

As the name suggests, the law’s primary focus remains on creating greater certainty on how the applicable German tax treatment to financial services would apply. It also has a range of very welcome measures that aim to provide certainty and the concept of a unilateral TPR that could run to a maximum 21 months from the Exit Date to allow for continuity and transition of services for banking and financial services as well as the running-off of legacy insurance services during this German TPR. The German Federal Government plans to review the efficacy of the Brexit- StBG 12 months after its entry into force on March 29, 2019.  

The German parliament has also voted in favor of a draft law on transitional arrangements in the areas of labor, education, health, social affairs and nationality introduced by the Federal Government following the withdrawal of the UK from the European Union (Übergangsregelungen in den Bereichen Arbeit, Bildung, Gesundheit, Soziales und Staatsangehörigkeit nach dem Austritt des Vereinigten Königreichs Großbritannien und Nordirland aus der Europäischen Union) (the Brexit-UG). 

The Brexit-StBG’s proposed relief for financial services

The Brexit-StBG recitals make it clear that the withdrawal of the UK from the EU will have a variety of effects on companies in the financial sector and their business activities, including rights of market access (passporting) from the UK into the EU and thus Germany. In order to safeguard the functioning and stability of the financial markets, the law therefore provides, inter alia, for the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – (BaFin)) to be given the option to allow certain companies from the UK to continue to use the European passport temporarily for a maximum of 21 months from the Exit Date and thus make use of pre-Exit Date passporting permissions.  

The BaFin is required to adopt a proportionate risk-based approach to how it uses that TPR power, with whom and for how long – i.e., not all sectors or financial market participants may be able to get the same treatment under the TPR regime (i.e. not all may have the benefit of Germany’s up to 21 month period and shorter-term arrangements might be considered), and for some the period may be subject to a number of rolling extensions. That being said, granting these powers to BaFin, notably in respect of the Banking Union, puts it on a potential collision course with that of the ECB-SSM. 

In the derivatives area, the law notes that Brexit could affect a large number of contracts with very large business volumes. The draft Brexit-StBG considers this issue quite poignantly by stating: “If all the UK financial firms in question were obliged, without exception, to settle their cross-border domestic contractual relations immediately after Brexit, this could in many cases foresee adverse effects not only for those firms but also for their domestic counterparts.”  The BaFin has separately published updated guidance, in English, on March 15, 2019⁶ on OTC derivatives, trading venues and clearing. 

The Brexit-StBG also clarifies that UK payment and electronic money institutions may continue to operate for a transitional period (again unclear whether general or firm-specific TPR) as well as that:

• Securities trading will also be facilitated for German trading participants on British markets for a transitional period of 21 months – it is unclear whether this German unilateral period would be automatically recognized under the UK’s own TPR.
• In German law-covered bond transactions pursuant to the Pfandbriefgesetz, the Brexit-StBG proposes that UK assets may continue as assets in the covered pool until maturity of the covered bond; it remains to be seen whether this will be followed/sanctioned by the ECB in its role of setting Eurosystem collateral asset eligibility.
• Changes that make it easier to dismiss material risk takers at significant institutions (Risikoträger und Risikoträgerinnen bedeutender Institute).  The reference to significant institution means the concept within the meaning of CRD IV/CRR and not necessarily of significance for the Banking Union and thus direct ECB-SSM supervision purposes.
• “Other changes” include amendments to the German Payment Services Supervision Act (Zahlungsdienstleistungsaufsichtsgesetzes) which transposes PSD 2 as well as to the German Investment Ordinance (Anlageverordnung) and the Pension Fund Supervision Ordinance (Pensionsfonds-Aufsichtsverordnung). The latter permit German domiciled insurers and pension funds to remain invested in assets located in the UK and that these may stand as security for obligations towards insured stakeholders.  It remains to be seen whether and how EIOPA will respond to this.   

Equally, in order to safeguard the interests of policyholders and beneficiaries under existing insurance contracts, BaFin may authorize UK insurance undertakings concerned to continue their activities in Germany for the 21-month Brexit-StBG TPR period. This aims to allow UK insurers to run-off their German book and terminate contracts with German counterparties or transfer them to a suitably licensed entity within the EU-27/EEA with relevant regulatory permissions into Germany.  This German insurance focused TPR, which may also have firm specific conditions attached to it, will only be possible for insurance exposures/obligations that were concluded before the Exit Date and not new business.  

It remains to be seen whether the European Insurance and Occupational Pensions Authority (EIOPA) may have its own views on how this proposed legislative power fits with its own clear supervisory expectations set in SPoRs that are notably addressed to BaFin. EIOPA itself communicated further supervisory expectations as part of its SPoRs at the start of 2019 (see our dedicated coverage from our Eurozone Hub on this.) Other ambiguity in the original drafting that has now been resolved in the approved form of the Brexit-StBG relates to how payment services will be dealt with, including implementing similar TPRs for those firms to whom the German Payment Services Supervision Act applies when providing payment services and electronic money transactions from establishments from the UK.  

As the Brexit-StBG is effectively a tax driven piece of legislation, it also has some specific regulations on how real estate transfer tax and inheritance tax are dealt with. This may impact certain transactions. Further, there are regulations for companies incorporated under British law (in particular Limited companies, which may also be able to be converted into German limited companies – GmbH) so that Brexit does not trigger the disclosure and taxation of hidden reserves. The amendment states that it concerns the “renunciation of unwanted tax revenue.”

What the Brexit-StBG does not do in the same manner, but which other EU Member States have done, is provide for grant extended recognition to settlement systems. This is the case even if Art. 12 of the Brexit-StBG aims to make technical changes to Art. 102 of the German Securities Trading Act (Wertpapierhandelsgesetz) and thus permits German domiciled market participants access to UK trading venues for up to 21 months as granted by the BaFin. As this change affects law and principles that are derived from and/or identical provisions set in EU law, notably MiFID II/MiFIR and/or the competencies of ESMA as well as the SPoRs, certain questions do present themselves as to whether this too could cause friction.  Similarly, German legislators have not taken similar measures as in other Member States to permit “easier” transitions of contractual relationships even if the German government has made it easier to convert German presences of UK headquartered entities into German companies. 

Germany’s measures regarding the European Investment Bank and Brexit

With the withdrawal of the UK from the European Union, the UK will no longer be a member of the European Investment Bank. The UK shall then no longer hold any interest in the subscribed capital of the Bank, shall no longer be entitled to nominate members and alternates of the Board of Directors, and the term of office of the members and alternates of the Board of Directors nominated by the UK shall end after the Brexit. 

To enable the German representative to approve the planned amendment to the Articles of Association in the Council of the European Union, the German Federal Government has submitted a draft Act to grant approval pursuant to Section 7 (2) in conjunction with Section 1 of the Integration Responsibility Act (Integrationsverantwortungsgesetz-(IntVG)) for the European Investment Bank’s proposal to amend the Articles of Association by October 15, 2018. It states that in order to maintain the capital of the European Investment Bank at the same level, the remaining Member States must increase their share of the subscribed capital. Furthermore, you can use the Amendment of the Articles of Association Measures to improve the internal organization of the Bank, in particular in the following areas: risk management and regulatory supervision as well as to strengthen the Board of Directors.

2. Brexit-related legislative developments in France  

The French Ministry of Economy and Finance (Ministère de l'économie et des finances) published Ordinance (No 2019-75) on preparatory measures for the withdrawal of the UK from the EU in the field of financial services (Ordonnance n° 2019-75 du 6 février 2019 relative aux mesures de préparation au retrait du Royaume-Uni de l'Union européenne en matière de services financiers) on  February 7, 2019 (the French Brexit Law). According to the French Brexit Law, a number of measures are expected in relation to financial services, which will enter into force from the date of the UK's withdrawal from the EU in the case of No Deal Brexit.⁷ So far, the French government has not announced a temporary authorization scheme for incoming UK financial companies and funds. The measures of the French Brexit Law are described below.

French supervisory powers 

According to the French Brexit Law, the French Prudential Supervision and Resolution Authority (Autorité de Contrôle Prudentiel et de Résolution - ACPR) would also have the power to monitor compliance with French law with regard to the implementation of agreements concluded before Brexit on the basis of the cross-border passport or branch passport which the parties continue to implement after Brexit. It remains to be seen how the ACPR will discharge these powers in conjunction and/or cooperation with the ESAs as well as the ECB-SSM, either as a result of specific existing EU-level legislation and/or the SPoRs. 

Protection for French-domiciled insurance policyholders

The French Brexit Law provides for the protection of French-domiciled insurance policyholders who have concluded an insurance contract with a British domiciled risk carrier prior to Brexit. The British domiciled risk carriers are recommended to transfer their risk insurance business domiciled in France to an EU risk carrier. Should UK insurance companies not comply with such conditions - the insurance contracts will be invalid, although such invalidity will not be enforceable against insured parties, subscribers and beneficiaries. Insurance contracts entered into by UK insurance companies cannot be renewed and also cannot provide for the payment of new premiums, in the event of a No Deal Brexit. This approach goes beyond, for example, what is being proposed by Germany’s BaFin in their approach but is in line with a more stringent reading of the SPoRs.

French access to interbank settlement systems and delivery and settlement systems

One of the newly published measures is to recognize UK interbank settlement systems and delivery and settlement systems, as systems that would benefit from the provisions of Directive 98/26/EC on settlement finality in payment and securities settlement systems. The aim is to prevent French participants in such schemes from being excluded from the UK schemes because of the legal uncertainty that would result from the fact that the UK schemes would not be recognized (by the French authorities) as benefiting from the provisions of Directive 98/26/EC. This is a unilateral right imposed by French legislation, and it is not clear whether this would be compatible with EU-level law and/or the SPoRs or how it would upset measures of other legislative policymakers of those advancing NEBL instruments in “their” jurisdictions. 

French financial markets regulator as a competent authority to supervise activities relating to securitization 

The French Financial Markets Regulator (Autorité des marchés financiers) (AMF) has been designated as the competent authority for the supervision of securitization-related activities. For the implementation of specific rules for the management of collective investment schemes whose assets correspond to certain investment ratios in European companies, the French Brexit Law provides for a grandfathering clause in respect of investments in UK collective investment schemes. However, even after Brexit (for a period to be determined by an order (Arrêté) of the French Minister for Economic Affairs, British firms will still be eligible for certain investment quotas in European firms for a maximum period of three years.  As with the provisions proposed in Germany, this proposed empowerment of the AMF may collide with the regulatory perimeter either in existence with borders drawn by EU-level legislation or as sharpened by the SPoRs. 

Ensuring the continuity of the use of framework contracts for financial services and a transfer window to France

The French Government has taken measures to adapt French law with regard to the volume of netting transactions and the possibility of compound interest in order to allow framework contracts for financial services to be governed by French law. It also provides for a mechanism for the transfer of framework agreements on financial services (such as ISDA agreements) from UK domiciled firms to French domiciled firms in the same group. These measures are aimed specifically at derivatives transactions and require that:

• The clauses of the replicated master agreement must be identical to those of the original master agreement concluded with the investment services provider governed by English law, except for the clause designating the applicable law and the jurisdiction clause, which must designate French law and the exclusive jurisdiction of the Paris Commercial Court and the Paris Court of Appeal, and any other clause relevant to ensure the performance of the new master agreement pursuant to these amendments;
• The new French entity must be part of the same corporate group and have a credit quality step within the meaning of CRR which is identical to or higher than the credit quality step assigned to the UK entity on the date of the receipt of the offer; and
• The offer to replicate has to come from the EU investment firm or EU credit institution of the affected UK group - the offer cannot be made from the EU counterparty i.e., the client of the UK entity. 

Effectively this aims to ease large-scale substitutions and replications of documented relationships (also in conceptual accordance of the doctrine of novation under French law, which differs in part to that under English law). This is welcome, if at yet untested by the courts nor is it clear whether this will work operationally without issues arising, especially if booking center details do not change. The ability to make use of this transfer-window to get the documented relationships rebooked into a French entity and then make subsequent amendment to tidy-up the parts that do not work (including operational arrangements) or documents linked to say finance facilities (which may not avail of this transfer window) is something that raises a number of questions. 

This transfer of framework agreements for financial services may be made based on the tacit consent of the French domiciled “client” counterparty to the group, unless the French counterparty has objected to such a transfer within five days of receipt of the transfer proposal. It is unclear how this provision would work in situations where there is no French domiciled but say a German domiciled client. As a result, the need for counterparty consents is still very much likely to be required. Moreover, this transfer mechanism will only be available for 12 months from the date of entry into force of the French Brexit Law - consequently from the Exit Date and in the absence of an EU-UK Withdrawal Agreement. 

Other derivatives related changes made by the French Brexit Law include changes to how default interest due for a period of less than one year for derivatives instruments is compounded and equally the scope of financial transactions (emission allowance units, spot foreign exchange transactions or transactions in gold, silver, platinum, palladium or other precious metals) eligible for French law operation of close-out netting. These changes have been made in the context of ISDA’s publication of its French law version of the 2002 Master Agreement and are necessary irrespective of the Brexit-driven changes.

3. Brexit-related developments in Italy

Information for Italian customers of UK-based financial institutions providing services in Italy 

Italy has also been quick to issue its own Brexit-planning updates and approved Law Decree No. 22 of March 25, 2019 detailing its Brexit preparations (the Italian Brexit Law), which became effective as from March 26, 2019. Moreover, the Banca d’Italia (the BdI), which is an SSM NCA, has called on British financial institutions operating in Italy to inform their Italian clients about the measures adopted and the consequences for existing contractual relations, underlining the need to ensure full compliance with contractual obligations and the provisions governing their activities in Italy.  This in part follows some of the principles communicated in the SPoRs. 

This BdI communication issued on February 19, 2019, which was sent by the BdI to banks, payment institutions and e-money institutions authorized to provide their products and services according to procedures under European law, gives clear indications as to which information has to be provided promptly to all customers to ensure an orderly, transparent and correct management of existing relationships following “Brexit.” Communications must be written in clear and plain language and include the contact details for customers requiring clarification and assistance, and the same information must be published on banks’ websites. If significant effects on contract continuity or on customers’ rights are expected, financial institutions must promptly inform the BdI, using the dedicated email addresses.

The Italian Brexit Law aims to protect financial integration, the stability of the Italian financial system, the continuity of trading and the provision of financial services and the rights of Italian clients. UK firms that are carrying out their activities in Italy at the date of withdrawal are allowed to continue carrying out such activities during an 18-month transitional period, provided that they send a notice to the relevant Italian authority. In particular:

• UK banks may continue to carry out their activities as long as they give prior notice to the BdI (with the exception of banks collecting savings under the freedom to provide services regime, whose activity will be limited to the management of relationships established before the date of withdrawal).
• With regard to investment services and activities, Italian branches of UK banks and investment firms may continue to carry out their activities, as long as they give prior notice to CONSOB. UK banks and investment firms operating under the freedom to provide services regime may only continue to carry out their activities vis-à-vis eligible counterparties and professional clients (i.e. they will have to terminate their activities vis-à-vis retail clients and professional clients on request starting from the date of withdrawal).
• Branches of electronic money institutions may continue to operate under the right of establishment as long as they give prior notice to the BdI. UK electronic money institutions and payment institutions operating under the freedom to provide services regime must terminate their activities and may only manage the termination of existing relationships within six months of the Exit Date.
• With respect to asset managers, the transitional measures mean that they will have to cease to carry out any activity vis-à-vis retail clients and professional clients on request from the date of withdrawal.
• From the date of withdrawal, UK insurance and reinsurance undertakings and intermediaries operating under the right of establishment or the freedom to provide services will be cancelled from the EU list of undertakings and the IVASS register (i.e. RUI) respectively. In order to guarantee the continuity of services for policyholders, insured persons and persons entitled to insurance benefits, these companies may continue to operate during an 18-month transitional period with respect to the management of existing contracts and coverages in force at the date of withdrawal, without entering into new contracts or renewing, even tacitly, existing contracts. UK undertakings are requested to submit to IVASS a plan containing the measures allowing the regular and proper execution of existing contracts and coverages (including payments of claims) within 90 days from the date of entry into force of the Italian Brexit Law. Policyholders may withdraw from existing contracts with a duration of more than one year at no additional cost.

UK firms must inform their clients, other persons with whom they have dealings and the relevant Italian authorities of the initiatives taken to ensure the orderly termination of business and of the operating regime applicable to UK firms within 15 days from the date of entry into force of the Italian Brexit Law. The notice to the relevant authority to continue banking activities and financial services during the transitional period must be sent no later than three working days prior to the date of withdrawal, in accordance with the procedures to be laid down by each competent authority in Italy.

4. Brexit-related legislative developments in Spain

Spain has (currently) more British citizens resident within its jurisdiction than any other EU country. Official figures indicate that there are more than 300,000 British nationals living in Spain—some estimates suggest that the actual number is closer to one million, a large amount of which are either pensioned and/or of pensionable age or working in Gibraltar—a contentious Brexit-related twist in its own right. As a result, a number of these British nationals are users of financial services from Spanish providers or reliant on UK financial services providers being able to provide retail financial services to them in Spain, including relating to health and other insurance products.

The Spanish government has sought to reassure British nationals living in Spain that they are working on agreements to ensure their right to live and work in the event of a No Deal Brexit and have set up a dedicated website. In January 2019, the Spanish government announced in Madrid that it was planning emergency measures to ensure medical care for British citizens living in Spain from the time the UK leaves the EU, if no agreement is reached, provided it is based on the premise of reciprocity. A similar arrangement is proposed for participation in local elections.

Preparation of a new 'No Deal' Brexit Law 

The Spanish government’s new Royal Decree-law (decreto ley) outlining contingency plans for British residents after a No Deal Brexit (the Spanish Brexit Law), sets out the following key points (although the law is more focused on guaranteeing rights for current residents (not necessarily new residents) rather than creating a framework for financial services):

• Registration as a third-country national
  Following Brexit, UK residents must register in Spain as third-country nationals.
• Additional period for registration
  Spain guarantees that a "sufficient" transitional period will be granted (although this is not yet defined and depends on the date of entry into force of the UK's withdrawal from the EU).
• Automatic registration as a third-country national
  From March 30, 2019, existing EU documents (registration certificate or residence card as a family member of an EU citizen) will remain valid until the end of the additional period.  During the still undefined “grace period,” the UK must apply for a new third-country passport (Tarjeta de Identificación de Extranjeros (TIE)). 

However, the Spanish authorities assure that the procedure for granting this new status to British nationals legally residing in Spain will be “virtually automatic.”

Article 19 of the Spanish Brexit Law covers all measures adopted concerning financial services and is intended for UK and Gibraltar financial entities that currently operate in Spain, and it contains several main provisions:

• Contracts for the provision of financial services signed prior to the departure of the UK from the EU will remain in force. It is thus made clear that contracts will not be terminated simply due to Brexit. This is in line with the statements of the European Commission.
• After Brexit, UK and Gibraltar financial entities must adapt to third-country regimes in order to continue operating in Spain.
• Given that some activities related to the management of old contracts may be subject to authorization, an extension of the prior authorization will apply to manage these contracts, but it will not cover new activity. This is in line with a stringent reading of the SPoRs. Any extension will be granted while processing the request for a new registration/authorization, or to facilitate the relocation or termination of old contracts.  In any event, the extension of prior authorizations will expire in nine months after the departure of the UK.  Activities related to the management of old contracts that do not require authorization can continue regardless of the aforementioned temporary regime.
• The Spanish financial supervisors will oversee this activity and may take any necessary measures to guarantee legal certainty and safeguard the interests of financial services clients.
• Spain’s overall transitional period will end, regardless of the application date, nine months after the effective withdrawal date of the UK from the EU.

5. Brexit-related legislative developments in the Netherlands 

On January 29, 2019, the draft “Dutch Brexit Act” was adopted by the Dutch Parliament (Tweede Kamer) and sent to the Dutch Senate (Eerste Kamer) for consideration.  The explanatory memorandum to the Dutch Brexit Act provides that the proposal is a product of an inventory carried out to see whether Dutch legislation needs to be amended as a result of Brexit. This stocktaking was because the withdrawal of the UK will lead to the loss of its EU membership, irrespective of whether a consensus is reached on a withdrawal agreement or whether the UK leaves the EU without an agreement. The existing legal frameworks provide sufficient flexibility to act quickly and appropriately in each of the scenarios currently foreseen - therefore, the Dutch Brexit Act only contains technical changes to Dutch legislation that are absolutely necessary and must come into force on March 30, 2019 and will run, thus applying Dutch TPR-style relief, for a period up to six months.

What does the Dutch Brexit Act cover? 

Neither the Dutch Brexit Act nor the accompanying explanatory notes contain (or mention) changes or measures specifically addressed to the financial sector. However, this general provision may also serve as a basis for legislative measures to be taken in the financial sector. 

Given the complexity and scope of the legislation that may be affected by Brexit, the Dutch legislator considers it important that rapid legislative action can be taken in cases of urgent unforeseen problems arising from Brexit. This is only necessary as far as it is necessary for the proper implementation of a Brexit-related binding EU act or to avoid unacceptable consequences. 
Equally, on February 4, 2019, the Netherlands Minister of Finance adopted an adjustment to the Dutch Exemption Regulation (Vrijstellingsregeling Wft), pursuant to which UK licensed MiFID firms are permitted to continue to provide investment services to professional investors and eligible counterparties in the Netherlands and perform investment activities in the Netherlands without having to apply for a license in case of a No Deal Brexit.

On March 7, 2019, an Act (level I) and a Regulation (level II) implementing the option under Recital 7 of the Settlement Finality Directive (the SFD) to apply the SFD to domestic institutions participating in payment/securities settlement systems governed by the law of a third country (non-EEA systems) in the Dutch Bankruptcy Act (Faillissementswet, Bankruptcy Act) entered into force. 

Therefore, the Dutch Brexit Act contains a general provision that allows necessary legislative measures to be taken rapidly through a general administrative order or ministerial decree instead of amending the law. These emergency measures are in principle of a transitional nature, i.e. they are usually temporary and/or are replaced by a more structured / formal legislative measure

Moreover, the Dutch government announced in its letter to the Dutch Parliament that British citizens with a valid right of residence in the Netherlands could reside in the Netherlands even after a 'no deal' Brexit on January 7, 2019. The Dutch government has decided that British citizens and their families legally residing in the Netherlands before March 29, may live, work and study in the Netherlands for at least another 15 months in the event of a Brexit through no fault of their own.  This transitional system also applies to family members of British citizens who do not hold EU citizenship themselves. During this 15-month period, the Dutch Immigration and Naturalization Service  (Immigratie en Naturalisatiedienst - (IND) ) will ask the approximately 45,000 British citizens legally residing in the Netherlands to apply for a permanent residence permit, which will be required after the transition period.  The IND will spread the invitations beyond the transitional period so that all those concerned can organize their future stay in the Netherlands properly. British citizens are entitled to the permit if they fulfil the same residence conditions as EU citizens.

6. Brexit-related legislative developments in Belgium

The Belgian government presented a draft Brexit Act to the House of Representatives on February 19, 2019 (the Belgian Brexit Law). The legislation addresses federal issues that need urgent attention in order to cope with the No Deal Brexit scenario. The draft law is part of a series of preparatory measures taken by the government as per the European Council’s request to Member States to intensify work of December 13, 2018. 

In the area of financial services, the Belgian Brexit Law is mainly a delegation of power to the Belgian government but also the Belgian Financial Services and Markets Authority (FSMA), which next to the National Bank of Belgium (NBB) as the lead prudential regulatory authority, certainly for the banking sector, is the competent conduct of business regulator. FSMA in turn has issued its own communication to the market which, along with powers of the government to adopt specific measures to either extend or clarify application of EU and Belgian requirements to third-country firms – and thus those in or operating from the UK. 

FSMA’s communication invites UK firms to inform immediately if they intend to continue operating in Belgium post-Brexit and, to the extent not already done so, file the relevant notification or application. Both the Belgian Brexit Law and FSMA’s most recent communications give an idea of the direction Belgium will take in granting certain transitional arrangements to financial services companies such as credit institutions, investment firms, payment institutions, fund managers and certain credit providers and credit intermediaries.  

What does the Belgian Brexit Law mean for the financial sector?

As with efforts of other Member States the law aims to protection of investors’ interests, to preserve the proper functioning, integrity and transparency of financial markets. This is done by:

• Creating measures to align, to a certain extent, the regime for third-country investment firms with the regime for investment firms governed by the law of a Member State of the European Union. For example, as Belgian legislation currently stands, these firms are not subject to the transaction reporting rules of MiFID II/MiFIR, even when they carry out transactions on markets governed by the law of an EEA Member State;
• Setting specific provisions regulating the activities that may be carried out in Belgium, by a regulated market, MTF or OTF under the control of the law of a third country (i.e. a similar approach as taken by Germany) and to define, if necessary, the criteria for considering that such an activity is carried out in Belgium, in particular when measures are taken on Belgian territory to enable established users, members and participants to access and trade its markets remotely;
• Facilitating exercise of powers by the Belgian government to secure contractual continuity and continued service by “financial services providers” which are “undertakings or persons of UK or Gibraltar origin [i.e. corporate domicile] that are active in the financial sector in Belgium and will have lost their license or other form of authorization in Belgium…” This effectively grants a Belgian TPR to credit institutions, investment firms, insurance or re-insurance undertakings, payment institutions, e-money institutions, a range of funds and insurers operating from or otherwise domiciled in the UK or Gibraltar.  

Under Belgian law, for example in the field of investment services, Articles 13 and 14 of the Law of October 25, 2016 on the taking up, pursuit and control of the activity of providing investment services and the status and supervision of portfolio management and investment advisory companies, define the conditions under which investment firms governed by the law of third countries are authorized to offer investment services and/or to carry on investment activities in Belgium. These provisions require the establishment of a branch in Belgium, except for the provision of investment services to certain specific types of clients, namely eligible counterparties, professional clients per se and, subject to an additional condition of equivalence, nationals of the Home State of the undertaking concerned or of a State in which that undertaking has established a branch.  However, FSMA is authorized to prohibit the provision of such services in Belgium if no branch is established there, where the undertaking concerned is governed by the law of an EU Member State which does not grant the same possibilities for access to its market for investment firms governed by Belgian law.

The continuity of these contracts could thus be called into question if their mere execution, or if certain events occurring in the context of their execution (“life cycle events⁸ ) were to involve the provision of a (new) service or the exercise of a (new) activity and thus require, in Belgium, an approval, registration, or at least an authorization from the Belgian NCAs. The Belgian Brexit Law’s powers for the government and/or NCA to take action aims to permit a Belgian TPR for those contracts and activity subject to time limits the supervisors consider appropriate.  

Similarly, in the case of insurance contracts, services provided under insurance contracts may be considered as constituent elements of the insurance activity and therefore require, in principle, an authorization system. Insofar as the services provided under insurance contracts may constitute an insurance activity, it is therefore appropriate, for the protection of insurance creditors (policyholders and beneficiaries), to allow the performance of contracts concluded prior to Brexit and—where appropriate—their renewal, but excluding the conclusion of new insurance contracts, thus in keeping with the SPoRs.  

Based on the Belgian Brexit Law, the government could further define in the field of investment services which life cycle events are considered to involve the provision of a (new) investment service or the exercise of a (new) investment activity in order to grant them the regime allowing their proper performance. It is at present unclear as to whether such action by the Belgian government would be taken unilaterally or in consultation with other EU Member States, or by the FSMA and NBB in conjunction or consultation with respective EU and other national competent authorities.

7. Brexit-related legislative developments in Luxembourg

Luxembourg’s Brexit efforts have culminated in a legislative bill (the Luxembourg Brexit Law) that confers further powers on the Financial Sector Supervisory Commission (CSSF) and the Office of the Insurance Commissioner (CAA), the power to take temporary measures to ensure the stability and proper functioning of the financial sector while ensuring the protection of depositors and investors in a No Deal Brexit

A significant number of British financial companies operate in Luxembourg on the basis of EU passporting rights. The Luxembourg Brexit Law introduces its own TPR up to a maximum period of 21 months following the Exit Date. This includes measures whereby the CSSF and the CAA have the possibility to treat British companies and institutions having contractual relations with Luxembourgish counterparties at the time of withdrawal as continuing on the basis of what are otherwise “expired passports”. These provisions apply only to contracts in force at the time of withdrawal of the UK, or to contracts concluded after that date, which are closely linked to a contract concluded before that date.  Further details on the approach of the Luxembourgish government and/or the NCAs remain, at the time of writing, sparse.

8. Brexit-related legislative developments in Poland 

Poland has prepared a trio of transition measures in the event of a No Deal Brexit. Financial services related measures and fallbacks are set out in one draft law, which is set to enter into force on March 30, 2019 (the Polish Brexit Act). The Polish Brexit Act permits UK or Gibraltar financial institutions that have provided services in Poland through a branch or across borders prior to March 30, 2019 to continue to provide selected services.  The right to continue to perform contracts will be limited (12 or 24 months) from Brexit, depending on the scope of services.  

British and Gibraltar companies have the right, and are entitled, to continue certain pre-Brexit financial contracts without the need of a Polish regulatory authorization during the following period of the Polish TPR:

• Agreements relating to investment services and activities: may continue for a period of up to 12 months but only in relation to existing activity. It is unclear as to how lifecycle events may be treated and across various derivatives and securities financing transactions.
• Credit agreements: in relation to existing contracts and extended on-going contracts (including upsizing facilities and/or risk exposure) for a period of no longer than 24 months. It is not clear whether this extends to and thus extends to cover similar changes to finance linked derivatives or other linked hedging arrangements.
• Insurance and reinsurance contracts: for life insurance contracts concluded in Poland for no longer than 24 months. For non-life insurance products the period is up to 12 months and for non-life insurance products firms may not extend ongoing insurance contracts, provide cover for new risks on the basis of exiting concluded contracts or amend exiting contracts to change risk exposures.
• Financial market systems: Participants in payment and settlement security systems may continue to perform agreements related to participation for a period not exceeding 12 months.
• Reinsurance: Reinsurance activity is permitted up to a period not exceeding 24 months. 
• Agreements on payment or electronic money services: relevant institutions are permitted to be conducted for a period not exceeding 12 months. 

The Polish Financial Supervision Authority (Komisja Nadzoru Finansowego (KNF) has also used the Polish Brexit Act to clarify certain rules on the conclusion of an outsourcing contract with a third country entity or a contract stipulating that the outsourced activities will be performed in a third country. The Polish Brexit Act on this point would ideally need to be read in conjunction with applicable EU regulatory requirements on outsourcing, notably the EBA’s revised Guidelines on Outsourcing.

Outlook and Next Steps

While the efforts of individual EU Member States and their now passed and/or proposed NEBLs may be welcome, even if they have gaps amongst them, and it is not clear when and how the EU will fill them, affected firms in the UK as well as those in the EU-27 will want to take quick action to ensure the provisions and opportunities are reflected appropriately in their strategic planning. This also includes looking at the terms for how to document engagement with their respective counterparties and/or end-users of respective financial services. 

In many instances, the TPRs may lead to more of a false sense of security than a robust fallback. This is specifically the case given concerns from EU supervisory policymakers and interest on certain business and booking models, notably the perceived over-use of reverse solicitation. That heightened interest could turn to even sharper scrutiny than set out in the SPoRs or where the SPoRs’ outcomes have been widened, including on say limiting the permitted use of back-branching by EU domiciled entities in third-countries—see standalone coverage on this from our Eurozone Hub.

If you would like to discuss any of the items mentioned above, in particular how to forward-plan any impacts on operationalizing compliance across documentation and non-documentation workstreams or how these priorities may affect your business or your clients more generally, please contact our Eurozone Hub key contacts.

1. Weighing in at 74 pages, this is the most comprehensive of the NEBLs, but as opposed to other EU-27 Member States this legislation covers a much broader reach of amendments or solutions that go well beyond NEBLs aimed at financial services. The Bill, in the form introduced to the Irish parliamentary process is available here↩
2. The Irish response is quite clear in Parts 7 and 8 in introducing measures to ensure that payment and securities settlements systems located in the UK, where one or more participants therein are Irish, can continue to be designated by the Irish Minster for Finance, subject to certain pre-conditions being fulfilled as an assessment by the Central Bank of Ireland, as being a “designated system” for up to nine months post the Exit Date for the purposes of how the EU’s Settlement Finality Directive was transposed into Irish law and thus protecting the settlement finality as well as related netting and collateral arrangements in the event of the failure of a participant in that system or the system itself.  This is an innovative if not legally interesting approach, especially as Ireland is reliant on UK domiciled financial market infrastructure providers in this field and it will remain to be seen how the EU Commission will treat this sensible proposal especially in light of its own proposals on temporary (up to 24 months) recognition of UK central securities depositaries (CSDs) to allow them to complete their registration as recognized third-country CSDs as well as similar EU relief in respect of certain central counterparties (CCPs).↩
3. See more here.↩
4. It is important to note that the German Federal Government and the German media rather confusingly refer to a “Hard Brexit” the same as a “No Deal” Brexit.↩
5. See more here.↩
6. See more here. ↩
7. Again – the continental confusion between the scenario of the UK leaving without an agreement i.e., a No Deal Brexit, is framed here as a Hard Brexit (which the UK considers to be a break with an agreement but on specific “hard” terms). ↩
8. for example, the renewal of the contract or the modification of an essential obligation of the contract.↩