What about Brexit and financial institutions?




The exit of the United Kingdom (UK) from the European Union (EU) is fast approaching. On 22 November 2018, it was announced that the EU and the UK had reached ‘an agreement in principle’ on their relationship after Brexit. On 25 November 2018, the 27 EU heads of government voted in favour of the agreement, which makes this day a landmark in the history of the EU. The deal still has to be agreed in the UK parliament amid considerable opposition, however. Jeremy Corbyn, the Labour Party leader, has expressed his view that the agreed deal is “the worst of all worlds”. The agreement provides no absolute certainty, particularly not for the long term. Brexit will have an impact on all businesses that operate internationally, including those companies operating in the financial services industry. This article discusses certain financial regulatory aspects of Brexit, in particular for smaller financial institutions.

Brexit is expected to have a major impact on the financial markets. This is because UK-based financial institutions, namely banks, insurance companies, payment institutions and investment firms, may not be in a position to offer their services within the EU under their UK licence, post-Brexit. In any case, the agreement in principle appears to stipulate that the City of London may lose its frictionless access to the EU, as the proposed system of of mutual recognition only works insofar the EU and the UK will have equivalence frameworks in place that allow them to declare a third country's regulatory and supervisory regimes equivalent for relevant purposes. As such, if the UK changes its rules (e.g., concerning maintenance of sound procedures within a financial institution), the EU will be entitled to almost immediately cancel access for UK institutions. Furthermore, a ‘no deal’ Brexit, which is a possibility at the time of writing, would lead to the immediate loss of market access for EU financial institutions to the UK and vice versa. If the system of European passporting of licences is discontinued without another appropriate arrangement in place, UK-based financial institutions will be classified as third-country financial institutions and will not be permitted to offer their services to clients in the EU without having obtained a licence from a supervisory authority within the EU for which they shall either establish a branch office or a full establishment. For financial institutions that serve a limited number of clients in the EU, obtaining a licence and subsequently being under permanent supervision with all the ongoing regulatory obligations to observe, may be unreasonably burdensome.


The sense of concern and unease in the market is appropriate. Without proper licensing, the continuation of existing services to clients within the EU will see UK financial institutions violate local regulatory law and, as a result, their clients will be in a relationship with a non-licensed service provider. This will be particularly awkward for clients that are regulated entities themselves, which have a responsibility to use regulated financial service providers.

Enforcement risks

The consequences of offering financial services in the EU without a licence are significant. Regulatory authorities, such as the Dutch competent authority, Autoriteit Financiële Markten (AFM), are entitled to enforce local laws by imposing orders subject to a penalty and impose administrative fines on entities that violate rules prohibiting them from acting as a financial institution without a proper licence.

It is, perhaps, worse for organisations if enforcement measures are taken. The decision of the regulatory authority will be made public, which will surely have an adverse effect on the image and market position of the institution. Furthermore, in various EU Member States, violating the licensing regime is a criminal offence and the infringer runs the risk of prosecution, resulting in a fine or even imprisonment.

The Netherlands: AFM view

Of course, parties are already preparing for Brexit. A number of large banks and insurance companies have already moved their headquarters to Frankfurt, Luxembourg, Amsterdam and other cities ‘on-shore’. For example, recently a large option trader decided to move its trading platform from London to Amsterdam, and, as a result, around €2.1bn of short-term financings and bonds will be traded in Amsterdam in the near future.

At the end of October 2018, the AFM published its view on Brexit, stating that it is the biggest source of political uncertainty for the financial sector in Europe and that the market should be aware that, in the end, a ‘no deal’ Brexit is a possible outcome, therefore parties must plan accordingly. Furthermore, as the AFM states, Brexit will cause a revolution in the European capital markets. The AFM, perhaps optimistically, expects that the Netherlands will become the centre for the financial trade infrastructure within the EU, post-Brexit, with approximately 30-40 percent of European financial trade being conducted from the Netherlands going forward.

What next?

Whereas a number of large financial institutions have already taken measures, many smaller entities have not. For these organisations there is little time left to take their decisions. In order to safeguard their operations within the EU, UK portfolio managers and brokerage firms have the following options: (i) create a full organisation in an EU country and obtain a licence that can be passported out to perform services in all countries of the EU; (ii) establish a branch office which will obtain a licence that cannot be passported throughout the EU; (iii) rely on ‘reverse solicitation’; or (iv) register with the European Securities Markets Authority in order to perform services for professional clients only.

For financial institutions with a limited number of professional clients in the EU, such as UK portfolio managers that perform services for one pension fund in a certain country, it may be worthwhile further exploring whether continuing their services under an existing mandate would be permitted without the need to undergo a lengthy and costly licensing procedure.

Existing mandates-reverse solicitation?

Apparently, a number of supervisory authorities in the EU have expressed the view that existing mandates between UK firms and EU clients may remain in place without triggering any regulatory issues. Not all regulatory authorities have taken that position, however.

MiFID II contains an exception for third-country investment firms in the EU, based on ‘reverse solicitation’. Licensing will not be required insofar as services are provided on the sole initiative of the client. To rely on reverse solicitation, a firm should submit its client relationship to an initiative test. The preamble of MiFID II describes that “a service should be considered to be provided at the initiative of a client unless the client demands it in response to a personalised communication from or on behalf of the firm to that particular client, which contains an invitation or is intended to influence the client in respect of a specific financial instrument or specific transaction”.

The test of whether there is ‘initiative of the client’ shall be made on a case-by-case basis for each investment service or activity provided, regardless of contractual clauses or disclaimers – for example, a contractual clause stating that the third-country firm will be deemed to respond to the exclusive initiative of the client. Third-country investment firms that are soliciting clients or potential clients in the EU or are promoting or advertising their services in the EU cannot rely on reverse solicitation.

Relying on ‘reverse solicitation’ may be considered when assessing existing relationships that are continued after Brexit. It should be noted, however, that, in the absence of any official position from the competent regulatory authority, assuming that there is ‘reverse solicitation’ may include the risk that later on, post-Brexit, the competent regulatory authority will take the view that the continued relationship has become unlawful and thus will take enforcement measures. Therefore, if possible, companies should approach the regulatory authority directly and ask for an official opinion. As usual, requests for an opinion, as with any case with the AFM, cannot be done on a ‘no-names’ basis, which creates the risk of being on the radar of the relevant supervisory authority.

Finally: what to do?

As the day the UK plans to leave the EU, 29 March 2019, rapidly approaches, UK financial institutions wanting to safeguard their operations within the EU should soon take appropriate measures to ensure that they remain in a position to provide their services. The AFM earlier announced that all licence applications made prior to 1 July 2018 would be finalised prior to 29 March 2019 and it also recently made it clear that this does not mean that licence applications filed later than that date will not be finalised before Brexit. Requests for opinions of the regulator may take up to a few weeks to be answered.

For EU financial institutions, a no deal Brexit or any Brexit that does not honour the current passporting regime or any alternative appropriate regime, will work the other way round and they may want to find alternative accommodation within the UK.


Lous Vervuurt is counsel at Buren. She can be contacted on +31 70 318 42 16 or by email: l.vervuurt@burenlegal.com.

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Lous Vervuurt


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