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Brexit Priorities

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  • Publish date: 05 June 2017
  • Archived on: 05 June 2018

With Article 50 negotiations under way, Clea Evagorou evaluates the planning priorities for financial services firms for the next two years.

After months of protests and arguments, the prime minister got her way on 29 March when the UK formally notified the European Council of its intention to leave the European Union. Although the prospect of a general election has dominated the headlines since, the outcome remains the same – the UK has two years to negotiate its exit terms and transitional arrangements.

Whatever one’s thoughts may be on this decision, financial services firms will need a plan of action. Waiting to see what unfolds in the discussions is not viable. Indeed Sam Woods, CEO of the Prudential Regulation Authority (PRA), has written to the CEOs and branch managers of all firms with cross-border activities between the UK and the rest of the EU asking them to inform the PRA of their plans.

In terms of contingency planning so far, financial firms can broadly be categorised into:

  • Large complex firms – well advanced in their contingency planning, and likely to have shortlisted locations in the EU27 to establish new entities.
  • Other firms – with less detailed business and product line analysis, these will now mobilise greater resources to understand the complexity of the challenges ahead.

Undoubtedly, the uncertainty around the timing and terms of cross-border market access presents a contingency planning challenge for all affected firms. But despite best intentions, there is a concern that not enough is being done or that plans are disorganised. “Our current assessment is that the level of planning is uneven across firms,” asserted Woods in his letter,

Brexit priorities

With Article 50 negotiations under way, Clea Evagorou evaluates the planning priorities for financial services firms for the next two years adding that “plans may not be being sufficiently tested against the most adverse potential outcomes – for example, if there is no withdrawal or trade agreement in place when the UK exits from the EU, and the UK and EU do not reach agreement on issues such as implementation periods, mutual recognition of standards, and co-operation in financial regulation or supervision.” So no question that the regulator will want to see plans around the hardest of Brexits. Weighing up all possibilities and their impacts is key to drawing up any plans. Here are some further priorities and practical measures worth considering to implement.


Flexibility is key, as a lot depends on the future relationship between the EU27 and the UK. But a well thought out strategy underpinned by detailed analysis should minimise client impact and please regulators.

Corporate structure

EU27 member state regulators have emphasised the unacceptability of “letterbox” entities, as stressed recently by Jean–Marc Goy, counsel of international affairs at the Commission de Surveillance du Secteur Financier in Luxembourg. In particular, firms must develop design options around their target operating model and governance frameworks to support regulatory discussions. The already tight implementation timeline is complicated by the sequential manner in which activities must be completed if a new holding company is to be established and authorised. This includes applying for membership of Financial Market Infrastructures (trade clearing/settlement); and client novation to the new entity.

Given the timeframe, firms must focus on minimising execution risk by moving activities with minimum impact to client serviceability and market access.


Capital market firms can choose between being authorised as credit institutions or full scope investment firms. Despite the similarity in the prudential framework, the decision is driven by the entity’s business model and the regulated activities it seeks to undertake. An additional factor is the time required for both the national competent authority (NCA) and the European Central Bank (ECB) to evaluate applications.

For investment firms the whole process is dealt with solely by the NCA and may therefore be quicker. However, over the longer term, for systemically important investment firms, the ECB may become the ultimate supervisor through the proposed Intermediate Parent Undertaking rules in CRD V or through other legislative measures.


In a “hard Brexit”, where the UK would not have market access to the rest of the EU, firms will lose the ability to offer some cross border regulated products and services. Woods adds: “Firms currently relying on passporting arrangements to undertake business in the UK should take into account the need to apply for authorisation from the PRA, which may be required in order to continue operating either as an incoming branch or as a subsidiary after the UK’s withdrawal from the EU. As part of this, firms should develop contingency plans for authorisation, including possible structural changes such as setting up a subsidiary.”

Regulatory engagement

Regulators are seeing an increase in firms approaching them for informal conversations. In the next few months, these conversations will become increasingly focused on regulatory authorisations and internal model approvals. Regulators will need to manage their resources and engagement cycle with firms. Regulators in some of the key EU27 financial centres may simply not have the availability to engage with all interested firms immediately “on demand”.

Consequently firms would be well advised to initiate or progress conversations to stay towards the front of the queue. In this context, firms may find it useful to prepare a regulatory engagement plan that sets out ongoing interaction with and communication to the relevant regulators and supervisors in the right manner and order. It is also worth stressing that negotiations could result in a large number of firms (physically based in the UK or providing services within the single market via passporting arrangements) coming directly under PRA authorisation and supervision. That means the judgement is down to them, which could affect whether a firm operates as a branch or subsidiary, as well as the services it can supply.

Staff considerations

Until negotiations conclude, there is no impact on EEA nationals’ ability to work in the UK. New legislation will confirm how EEA nationals will be treated post Brexit. Employers need to assess the impact of future employment restrictions and create contingency plans, for UK, EEA and third country nationals.

Factors to consider include whether workers should be applying for:

  • A UK nationality (subject to a five-year requirement) or for a nationality in another EU country (to avoid the need for work permits).
  • An EU Blue Card. This is not, however, offered by all the EU27 and is only open to highly skilled workers who earn over a specific threshold.

Firms should also assess whether they can use what is known as the Vander Elst concession where an employee who has a UK work permit can be sent to another EU member state without applying for a work permit. However, this might not be available once Brexit occurs, with an alternative option possible, such as a  permit to work in EU countries for up to 90 days a year.

Direct tax

Few changes are likely to occur while the negotiations take place. Post Brexit, it is entirely possible that the UK’s approach to taxation diverges from the current one, as future governments may have more freedom.

Indirect tax

Depending on negotiations, the UK would need to introduce its own customs duty system. VAT is already a part of UK law and will continue without the VAT Directive, subject to minor legislative changes. The UK is unlikely to develop new tax systems.

Stakeholder management

Organisations likely to be most affected by Brexit are best advised to have communication plans in place to ensure that their investors, employees and customers are kept up-to-date with the situation. They should be proactive, preparing consultations and communications in advance, working out what information they can give on operations, relocations and jobs, and deciding on the best means of communication. Firms should also start considering how they might respond to stakeholder enquiries or press coverage, and appoint a spokesperson and investor relations manager to run the process.

It’s going to be a long and bumpy ride, with the Financial Policy Committtee overseeing firms’ plans to mitigate risks to financial stability.

Firms are invited to respond to Woods’s letter by Friday 14 July 2017. The PRA will use the responses as an input to the Bank of England’s own contingency planning, and will share relevant information with the FCA.