Brexit update on cross-border services: MiFID II requirements vs. reverse solicitation

The European Securities and Markets Authority (ESMA) has recently issued a public statement to remind firms of the MiFID II requirements on the provision of investment services to retail or professional clients by third-country firms. With the end of the UK transition period on December 2020, UK firms now qualify as third-country firms under the MiFID II regime. The third country status of the UK as of 2021 was explicitly confirmed by the German regulator BaFin in a recent publication.

Pursuant to MiFID II, EU Member States may require that a third-country firm intending to provide investment services to retail or to professional clients in its territory have to establish a branch in that Member State or may conduct business requiring a license on a cross-border basis, without having a presence in Germany (so-called notification procedure/EU Passport). However, according to MiFID II, where a retail or professional client established or situated in the EU initiates at its own exclusive initiative the provision of an investment service or activity by a third-country firm, the third country firm is not subject to the MiFID II requirement to establish a branch and to obtain a license (so-called reverse solicitation).

With the end of the UK transition period on December 2020, ESMA notes that some “questionable” practices by firms around reverse solicitation have emerged. For example, ESMA states that some firms appear to be trying to circumvent MiFID II requirements by including general clauses in their Terms of Business or by using online pop-up boxes whereby clients state that any transactions are executed in the exclusive initiative of the client.

With its public statement, ESMA aims to remind firms that pursuant to MiFID II, where a third-country firm solicits (potential) clients in the EU or promotes or advertises investment services in the EU, the investment service is not provided at the initiative of the client and, therefore, MiFID II requirements apply. Every communication means used (press release, advertising on internet, brochures, phone calls etc.) should be considered to determine if the client has been subject to any solicitation, promotion or advertising in the EU on the firm´s investment service or activities. Reverse solicitation only applies if the client actually initiates the provision of an investment service or activity, it does not apply if the investment firm “disguises” its own initiative as one of the client.

However, despite this seemingly rather strict approach of ESMA, reverse solicitation is generally still applicable if a (UK) third-country firm

  • only offers services at the sole initiative of the client,
  • (only) continues an already existing client relationship or
  • continues to inform its clients about its range of products within the scope of existing business relationships (which is often agreed upon in the client´s contract).

It is argued that, for example, in the case of an existing account or deposit or an existing loan agreement that a UK third country firm continues to provide to an EU client after Brexit, no direct marketing or solicitation of the client in the EU takes place. In this case, the third country firm would not have solicited the client.

In a nutshell: What UK firms should consider

The provision of investment services in the EU is subject to license requirements and can include the requirement to establish a branch or a subsidiary in the relevant EU member state. The provision of investment services without proper authorization exposes investment firms to administrative or criminal proceedings. Where a client established in the EU initiates at its own exclusive initiative the provision of an investment service by a third-country firm, such firm is not subject to the requirement to establish a branch or to obtain a license (reverse solicitation). Generally, reverse solicitation also applies when existing client relationships are continued (which have been legitimately established), as the investment firm would not solicit a client in this case.

Brexit: ein Update

Das Jahr neigt sich dem Ende entgegen, was zugleich das nahende Auslaufen der Brexit Übergangsfrist bedeutet. Bevor wir uns in die Weihnachtspause verabschieden, werfen wir also nochmal einen Blick auf das aktuelle Brexit Geschehen. Neues gibt es zur Nutzung von UK-Ratings sowie zum Vertrieb von UK-Fonds in der EU.

Nutzung von UK-Ratings in der EU

Ende Oktober 2020 hat die Europäische Wertpapier- und Marktaufsichtsbehörde (ESMA) ihr Statement vom Oktober 2019 zu den Auswirkungen des Brexit auf UK-Ratingagenturen (Credit Rating Agencies – CRA) aktualisiert. Darin bestätigt die ESMA, dass EU-CRA UK-Ratings übernehmen können und UK-Ratings auf diesem Wege nach Ablauf der Übergangsfrist (weiter) in der EU genutzt werden können.

Nach dem Ablauf der Brexit-Übergangsfrist am 31. Dezember 2020 wird UK aus Sicht der EU zum Drittstaat; Ratingagenturen mit Sitz in UK gelten daher als Drittstaaten-CRA. Die EU-Ratingverordnung (Credit Rating Agencies Regulation – CRA-Verordnung) sieht zwei Möglichkeiten vor, wie Ratings von Drittstaaten-Ratingagenturen in der EU genutzt werden können. Zum einen die sog. Äquivalenz oder Gleichwertigkeit. In diesem Falle erkennt die EU durch einen förmlichen Beschluss die Gleichwertigkeit des UK-Aufsichtsregimes über CRA mit dem europäischen Aufsichtsregime an. Bis dato gibt es allerdings keinen solchen Gleichwertigkeitsbeschluss.

Als zweite Möglichkeit zur Nutzung von UK-Ratings in der EU sieht die CRA-Verordnung die Möglichkeit der Übernahme von UK-Ratings durch eine EU-CRA (sog. Endorsement) vor.

Damit ein Endorsement möglich ist, müssen drei Voraussetzungen erfüllt sein. Zunächst muss das Drittstaaten-Aufsichtsregime über Ratingagenturen bestimmte Standards erfüllen. Insoweit plant UK mit Ablauf der Brexit-Übergangsfrist am 01. Januar 2021 das Inkrafttreten des UK Statutory Instrument 266 vom 13. Februar 2019. Dies ESMA geht laut ihrer aktuellen Stellungnahme nunmehr zum einen davon aus, dass es zu dem geplanten Inkrafttreten im Januar 2021 kommt und zum anderen, dass das Regelwerk die in der CRA-Verordnung näher bestimmten Standards erfüllt.

Als weitere Voraussetzung bedarf es eines Abkommens zum Austausch von Informationen zwischen der ESMA und der britischen Finanzaufsicht FCA (Memorandum of Understanding – MoU). Dieses MoU wurde bereits rechtzeitig vor Ablauf der Brexit-Übergangsfrist geschlossen und ist hier abrufbar.

Schließlich muss eine EU-CRA die Entscheidung zur Übernahme von UK-Ratings treffen. Die Entscheidungshoheit liegt hier allein bei der jeweiligen EU-Ratingagentur, die ESMA hat darauf keinen Einfluss. Nach derzeitigem Stand hat die überwiegende Mehrheit der UK-Ratingagenturen entsprechende Vorkehrungen getroffen und eine Übernahmevereinbarung mit einer EU-CRA geschlossen. Welche UK-CRA das im Einzelnen sind, kann hier eingesehen werden.

Vertrieb von UK-Fonds in der EU

Ende November diesen Jahres hat die Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) mitgeteilt, dass UK-Fonds, die nach dem Ablauf der Übergangsfrist weiterhin in Deutschland vertrieben werden sollen, schon vor Ablauf der Übergangsfrist ihre Vertriebsanzeige einreichen können.

Derzeit gelten UK-Fonds noch als EU-Fonds. Haben sie in UK eine Vertriebserlaubnis erhalten, müssen sie in den anderen Mitgliedstaaten, in denen sie vertrieben werden sollen, keine erneute Vertriebserlaubnis beantragen, sondern zeigen der jeweils zuständigen Behörde einfach die bestehende Erlaubnis aus UK an (sog. EU-Passporting).

Nach dem Ablauf der Brexit Übergangsfrist ist ein EU-Passporting nicht mehr möglich. UK-Fonds gelten dann als Drittstaatenfonds. In jedem EU-Land, in dem ihr Vertrieb weiterhin erfolgen soll, muss dann ein bilaterales Drittstaaten-Vertriebsanzeigeverfahren durchlaufen werden. Damit ein lückenloser Vertrieb möglich ist, erlaubt die BaFin die Durchführung des Drittstaaten-Vertriebsanzeigeverfahren bereits vor Ablauf der Brexit Übergangsfrist, also bevor UK-Fonds tatsächlich als Drittstaatenfonds qualifizieren.

Brexit Abkommen ja, nein, vielleicht?

Mit der aktualisierten Stellungnahme des ESMA und der Mitteilung der BaFin liegt nunmehr Rechtssicherheit in weiteren Bausteinen des Finanzmarktrechts vor. Wir dürfen in der Zwischenzeit alle weiterhin gespannt bleiben, ob sich die EU und UK bis zum Ablauf der Übergangsfrist doch noch zusammenraufen und ein Abkommen schließen können. Die Hoffnung stirbt ja bekanntlich zuletzt.

ESMA update: Impact of Brexit on MiFID II/MiFIR and Benchmark Regulation

At the beginning of October 2020, the European Securities and Markets Authority (ESMA) has updated its previous statements from March and October 2019 on its approach to the application of key provisions of MiFID II/MiFIR and the Benchmark Regulation (BMR) in case of Brexit. As the EU-UK Withdrawal Agreement entered into force on February 2020 and the UK entered a transition period (during which EU law still applies in and to the UK) that will end on 31 December 2020, these statements needed to be revised.

This Blogpost highlights the updated ESMA approach on third-country trading venues regarding the post-trade transparency requirements (MIFID II/MiFIR) and the inclusion of third country UK benchmarks and administrators in the ESMA register of administrators and third country benchmarks (BMR).

MiFID II/MIFIR: Third-country trading venues and post-trade transparency The regulations of MiFID II/MiFIR provide for post-trade transparency requirements. EU investment firms which, for their own account or on behalf of clients, carry out transactions in certain financial instruments traded on a trading venue, are obliged to publish the volume, price and time of conclusion of the transaction. Such publication requirements serve the general transparency of the financial market. As ESMA has already stated in 2017, post-trade transparency obligations also apply where EU investment firms conduct transactions on a third country trading venue.

By the end of the transition period on 31 December 2020, UK trading venues will qualify as third country trading venues. Therefore, if an EU investment firm carries out transactions via a UK trading venue, it is, in general, subject to the MiFID II/MiFIR post-trade transparency obligations.

However, EU-investment firms would not be subject to the MiFID II/MiFIR post-trade transparency requirements if the relevant UK trading venue would already be subject to EU-comparable regulatory requirements itself. This would be the case if the trading venue would be subject to a licensing requirement and continuous monitoring and if a post-trade transparency regime would be provided for.

In June 2020, ESMA published a list of trading venues that meet these requirements. While the UK was a member of the EU and during the transition period, ESMA did not asses UK trading against those criteria. However, ESMA intends to perform such assessment of UK trading venues before the end of the transition period. Transactions executed by an EU investment firm on a UK trading venue that, after the ESMA assessment, would be included in the list, will not be subject to MiFID II/MiFIR post-trade transparency. In this case, sufficient transparency requirements would already be ensured by the comparable UK regime. However, any transactions conducted on UK trading venues not included in the ESMA list on EU-comparable trading venues will by the end of the transition period be subject to the MiFID II/MiFIR post-trade transparency rules.

BMR: ESMA register of administrators and third country benchmarks

Supervised EU-entities can only use a benchmark in the EU if it is provided by an EU administrator included in the ESMA register of administrators and third country benchmarks (ESMA Register) or by a third country administrator included in the ESMA Register. This is to ensure that all benchmarks used within the EU are subject to either the BMR Regulation or a comparable regulation.

So far, UK administrators qualified as EU administrators and have been included in the ESMA Register. After the Brexit transition period, UK administrators included in the ESMA register will be deleted as the BMR will by then no longer be applicable to UK administrators. UK administrators that were originally included in the ESMA Register as EU administrators, will after the Brexit transition period qualify as third country administrators. The BMR foresees different regimes for third country administrators to be included in the ESMA Register, being equivalence, recognition or endorsement.

“Equivalence” must be decided on by the European Commission. Such decision requires that the third country administrator is subject to a supervisory regime comparable to that of the BMR. So far, the European Commission has not yet issued any decision on the UK in this respect.  Until an equivalence decision is made by the European Commission, UK administrators therefore have (only) two options if they want their benchmarks eligible for being used in the EU: They/their benchmarks need to be recognized or need to be endorsed under the BMR.

Recognition of a third country administrator requires its compliance with essential provisions of the BMR. The endorsement of a third country benchmark by an administrator located in the EU is possible if the endorsing administrator has verified and is able to demonstrate on an on-going basis to its competent authority that the provision of the benchmark to be endorsed fulfils, on a mandatory or on a voluntary basis, requirements which are at least as stringent as the BMR requirements.

However, the BMR provides for a transitional period itself until 31 December 2021. A change of the ESMA Register would not have an effect on the ability of EU supervised entities to use the benchmarks provided by UK administrators. During the BMR transitional period, third country benchmarks can still be used by supervised entities in the EU if the benchmark is already used in the EU as a reference for e.g. financial instruments. Therefore, EU supervised entities can until 31 December 2021 use third country UK benchmarks even if they are not included in the ESMA Register. In the absence of an equivalence decision by the European Commission, UK administrators will have until the end of the BMR transitional period to apply for a recognition or endorsement in the EU, in order for the benchmarks provided by these UK administrators to be included in the ESMA Register again.

Brexit, still great uncertainty

Currently, the whole Brexit situation is fraught with great uncertainty due to the faltering political negotiations. The updated ESMA Statement contributes to legal certainty in that it clearly sets out the legal consequences that will arise at the end of the transition period. This is valuable information and guidelines for all affected market participants, who must prepare themselves in time for the end of the transition period and take appropriate internal precautions.

Brexit Update: What Happened So Far

The last year of the old decade brought so many twists and turns on the subject of Brexit that one could easily lose track. Hence, our first blogpost of the new decade will shed some light on the current Brexit situation and the next steps currently planned by British and European politicians. As always, we will focus in particular on the effects on the financial market.

Current Situation: What Will Happen Now?

Since the British Parliament approved Johnson´s Brexit deal in December 2019, the UK will leave on 31 January 2020. An 11-month transition phase will then come into force: the UK will remain in the EU single market and the customs union until the end of 2020. During this period everything will remain mostly the same for the time being.

During the transition period, the EU and the UK will have to reorganise their relations with each other, with future economic relations as well as security and defence cooperation being key issues. First of all, a comprehensive Free Trade Agreement is to be concluded, which can above all prevent customs duties at the borders. But other economic areas, such as the financial market in particular, must also be regulated, either as part of the Free Trade Agreement (which would be unusual from a legal perspective) or through a separate agreement.

11 months are a short time and one may have doubts as to whether this time will be sufficient. The European Commission is already considering equivalence assessments for the financial market. However, there will be not ONE equivalent decision (see here) for an earlier analysis of the equivalence principle of the EU). There are currently around 40 equivalence areas which need to be assessed in each case. Most equivalence decisions provide for prudential benefits, some provide for burden reduction and some can lead to market access. There will also have to be close cooperation between the UK and EU financial supervisory authorities. During the assessment process the EU will look at UK legislation and supervision and will take a risk-based approach – as for all other third countries. This means that the higher the possible impact on the EU market, the more granular will the assessment be conducted. In case the UK will stick with the current EU regulation, this will be an easier task. But as soon as the UK will break new ground to make the UK financial market more attractive the impact on the equivalent status will need to be considered.

It can be assumed that the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdiensteistungsaufsicht – BaFin) and the other European financial supervisory authorities will monitor the negotiations regarding a financial market agreement very closely during the transition phase and will adapt and communicate their intentions for action accordingly.

To Be Continued

Although a hard Brexit has been avoided, there will still be uncertainties about future relations between the EU and the UK. Financial market participants should follow the negotiations between the EU and the UK closely and not rely on the fact that a financial market agreement can be concluded successfully in the short transition period.

Risiken und Schwachstellen der Finanzstabilität – Bericht des Gemeinsamen Ausschusses der Europäischen Aufsichtsbehörden

Am 12. September 2019 hat der Gemeinsame Ausschuss der Europäischen Bankenaufsichtsbehörde (European Banking Authority – EBA), der Europäischen Aufsichtsbehörde für das Versicherungswesen und die betriebliche Altersversorgung (European Insurance and Occupational Pensions Authority – EIOPA) und der Europäischen Wertpapier- und Marktaufsichtsbehörde (European Securities and Markets Authority – ESMA) einen Bericht über die Risiken und Schwachstellen der europäischen Finanzmärkte und –systeme veröffentlicht.

Hintergrund

Der Gemeinsame Ausschuss der Europäischen Aufsichtsbehörden koordiniert die sektorübergreifende Zusammenarbeit zwischen EBA, EIOPA und ESMA, um so eine kohärente Aufsicht sicherzustellen. Unter anderem veröffentlicht der Gemeinsame Ausschuss im halbjährlichen Turnus Berichte, in denen Risiken und Schwachstellen in Bezug auf die Finanzstabilität in der Union nebst Empfehlungen, wie diese durch koordinierte Politik- und Aufsichtsmaßnahmen angegangen werden können, dargestellt werden.

Potenzielle Quellen für Instabilität und Handlungsempfehlungen

Im Einzelnen beschäftigt sich der Bericht mit dem Brexit, niedrigen Zinssätzen, unrentablen Banken, Leveraged Loans und Collaterized Loan Obligations sowie nachhaltiger Finanzwirtschaft und ESG-Risiken.

  • Brexit: Ein harter Brexit ohne Abkommen kann sich bspw. durch sinkende Vermögenswerte und steigende Risikoprämien auf den Finanzmärkten bemerkbar machen. Marktteilnehmer und Aufsichtsbehörden sollen deshalb ihre Arbeit an der Notfallplanung fortsetzen, sodass sie auch für einen harten Brexit gerüstet sind.
  • Niedrige Zinssätze: Es ist damit zu rechnen, dass die Zinssätze weiterhin niedrig bleiben, sodass die damit verbundenen Risiken berücksichtigt werden müssen, bspw. sollen bei Investmentfonds die Regeln für das Liquiditätsmanagement beachtet und Stresstests durchgeführt werden.
  • Unrentable Banken: Um die Widerstandsfähigkeit der Institute gegenüber einem schwierigeren wirtschaftlichen Umfeld zu erhöhen, sind weitere Investitionen in Finanztechnologien und das Erkunden von Möglichkeiten zur Konsolidierung des Bankensektors erforderlich. Gerade hier ist die konsequente Anwendung gemeinsamer Aufsichtsanforderungen und –regeln äußerst wichtig.
  • Leveraged Loans und Collaterized Loan Obligations (CLOs): Die Risiken, die im Zusammenhang mit dem Markt für Leveraged Loan und Collaterized Loan Obligations auftreten können, sollen weiter untersucht und identifiziert werden. Nach wie vor bestehen hier Unklarheiten über das Gesamtvolumen der ausstehenden Leveraged Loans und über die letztendlichen Risikoträger der CLO-Tranchen, wodurch eine Unterbewertung von Risiken droht.

Nachhaltige Finanzwirtschaft und ESG-Kriterien: der Klimawandel und die Implementierung der ESG-Kriterien Environment, Social und Governance kann erhebliche Risiken für das Finanzsystem bergen (vgl. dazu auch hier ),weshalb Aufsichtsbehörden und Finanzinstitute bspw. mittels Szenarioanalysen und Stresstests ihre Risikobewertung daran anpassen sollen.

Fazit

Die Handlungsempfehlungen sind für Marktteilnehmer rechtlich nicht bindend. Die nationalen Aufsichtsbehörden werden ihre Aufsichtspraxis jedoch an die Empfehlungen des Gemeinsamen Ausschusses der Europäischen Aufsichtsbehörden anpassen, sodass sich auch die Marktteilnehmer an den Handlungsempfehlungen orientieren sollten.

ESMA Supervisory briefing on the supervision of non-EU branches of EU firms providing investment services and activities

With Brexit coming up, many companies, especially those in the financial sector, have taken precautions and relocated their EU head offices to one of the 27 remaining EU member state to ensure that, whatever the outcome of the Brexit negotiations, they will have access to the European single market.  Offices in the UK, which will qualify as a third country after Brexit, will often be operated as branches.

On February 6, 2019, ESMA published its MIFID II Supervisory briefing on the supervision of non-EU branches of EU firms providing investment services and activities. Through its new Supervisory briefing, ESMA aims to ensure effective oversight of the non-EU branches by the competent authority of the firm´s home member state.

This article provides an overview of the measures proposed by ESMA to national regulatory authorities, divided into three areas: (i) ESMA´s supervisory expectations in relation to the authorisation of investment firms; (ii) the supervision of ongoing activities of non-EU branches by the competent authority; and (iii) ESMA´s proposed supervisory activity of the competent authority.

Supervisory expectations in relation to the authorisation of investment firms

The relocation of a company to the EU means that an authorisation covering the respective business model must be applied for in the respective EU member state. The authorisation procedure must, inter alia, include a description of the company’s organisational structure, including its non-EU branches. The competent authority should be satisfied that the use of the non-EU branch is based on objective reasons linked to the services provided in the non-EU jurisdiction and does not result in situations where such non-EU branches perform material functions or provide services back into the EU, while the office relocated to the EU is only used as a letter box entity. To this end, the competent authority should make its judgement on the substance of the business activity, the organisation, the governance and the risk management arrangements of the applicant in relation to the establishment and the use of branches in non-EU jurisdictions. Therefore, the firm´s program of operations should explain how the relocated EU head office will be able to monitor and manage any non-EU branch, clarify the role of the non-EU branch and provide detailed information, such as:

  • an overview of how the non-EU branch will contribute to the investment firm´s strategy;
  • the activities and functions that will be performed by the non-EU branch;
  • a description of how the firm will ensure that any local requirements in the non-EU jurisdiction do not interfere with the compliance by the EU firm with legal requirements applicable to it in accordance with EU law.

Supervision of ongoing activities of non-EU branches

In order to allow the competent authority to appropriately monitor firms providing investment services or activities on an ongoing basis, firms should provide the competent authority of its home member state with relevant information on any new non-EU branch that they plan to establish or on any material change in the activities of non-EU branches already established. Therefore, the competent authority should, taking into account the importance of non-EU branches for the relevant firm, request on an ad hoc or a periodic basis, information on, inter alia:

  • the number and the geographical distribution of clients served by the non-EU branches;
  • the activities and the functions provided by the non-EU branch to the EU head office.

Supervisory activity of the competent authority

The competent authority should put in place internal criteria and arrangements to supervise comprehensively and in sufficient depth the activities that branches of EU firms under their supervision perform outside of the EU. For that purpose, the competent authority should prepare plans for the supervision of non-EU branches of EU firms and identify resources dedicated to this activity. These resources should be capable of performing a critical screening of the firms under their supervision that have established non-EU branches, including, information received or requested in relation to these branches.

Upshot

As the Supervisory briefing shows, EU supervisors are urged by ESMA to ensure that companies relocating to the EU as a result of Brexit are not just used as mere letter box entities to gain access to the European single market and the actual investment services are provided via the non-EU branch. Therefore, the competent authorities should take a closer look at the firm´s non-EU branches, to ensure that the branch has the function of a branch not only on paper but also in practice. Investment firms should be prepared for this supervisory practice.

The BREXIT Agreement – what it means for enforcing judgments across the European Union

The client alert is available for download here.

The UK, as an EU Member State, currently benefits from the mutual recognition and enforcement mechanisms that operate across all 28 EU member states under the so- called “Recast Brussels Regulation”.

The Recast Brussels Regulation provides a simplified EU-wide mechanism for the mutual recognition and enforcement of court judgments in EU Member States. A judgment creditor simply has to provide the competent enforcement authority in another Member State (for example, where the judgment debtor has assets) with a copy of the judgment and a standard-form certificate and it can then begin the enforcement process. No other procedure is required to enforce its judgment, and there is no review of the merits.

There is a very high bar for refusal of recognition and enforcement under the Recast Brussels Regulation. This means that, in general, a party armed with an English judgment has a speedy process to enforce that judgment in any other EU member state such as Germany, Italy, Spain, or France without recourse to local law. Similarly a judgment from any other Member State is currently easily enforced in the UK.

The Draft Agreement on the withdrawal of the United Kingdom from the European Union (the “Draft Withdrawal Agreement”) was published on 14 November 2018, and has been approved by the other Member States. While its future is far from certain, and it is not impossible that there will be revisions to a number of its clauses including the proposed length of the “Transition Period”, it is very likely that some form of disengagement with the Recast Brussels Regulation will accompany the UK’s departure from the EU.

Nonetheless, under Article 67 of the Draft Withdrawal Agreement, the current regime for mutual recognition of judgments will soon no longer apply in the U.K. The Recast Brussels Regulation will cease to apply to proceedings commenced after the end of the Transition Period – currently due to end in December 2020. If there is a “no deal” Brexit, it would cease to apply to any proceedings commenced after 29 March 2019.

Unless there is a further agreement to govern mutual recognition of judgments agreed before that date the UK courts will revert to the application of common law rules of recognition and enforcement, where the grounds for refusing to recognise a foreign judgment include matters such as whether the other party participated in the foreign proceedings, and whether (on an English law analysis) the foreign court had jurisdiction over the defendant at the time the foreign proceedings were commenced.

It is almost inevitable that the recognition process here of judgments from EU Member States will lengthen, become more costly, and see a significant increase in the successful resistance of enforcement. It should be born in mind, however, that the position will be the same as currently applies to judgments from the United States.

Enforcement of English judgments across the European Union will, in turn, become subject to the widely-varying national laws of each EU Member State. The process of enforcing an English judgment in a Member State is likely to prove more costly and onerous (with a lower rate of success) than the current streamlined procedure.

As a result of the Draft Withdrawal Agreement clients and friends completing jurisdiction and dispute resolution clauses in contracts involving parties from EU Member States would be advised to consider their options carefully, including the option of arbitration, in light of the future disapplication of the Brussels regime.

On the same timetable as the disapplication of the Recast Brussels Regulation, the Draft Withdrawal Agreement will also disapply two other European instruments which currently set the rules on deciding which law applies in both contractual and non- contractual disputes where there is no written agreement specifying the governing law. These are the so-called Rome I (choice of law in contractual disputes) and Rome II (choice of law in non-contractual disputes) conventions. At the same time as parties pay closer attention to their choice of jurisdiction for their disputes, parties should also pay closer attention to specifying their governing law.

Germany is paving the way for an informal transition period for the financial market in case of hard Brexit

On 20 November 2018, the Federal Ministry of Finance of Germany published a Draft Act on Tax-Related Provisions concerning the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union.

The Draft Act proposes amendments to the German Banking Act (Kreditwesengesetz) and the Insurance Supervision Act (Versicherungsaufsichtsgesetz) and aims to avoid any harm to the functioning or stability of financial markets in case of a hard Brexit, i.e., the withdrawal of the UK from the EU by the end of March 2019 without an agreement.

BaFin will be allowed to grant a transition period until the end of 2020 for passporting financial services into Germany

The proposed amendment to the KWG will allow the German Federal Financial Supervisory Authority (BaFin) to permit firms based in the UK, which have been providing cross-border banking or financial services based on a European passport before Brexit, to continue to operate financial transactions in Germany until the end of 2020 at the latest. The proposal reads:

In the event that the United Kingdom of Great Britain and Northern Ireland withdraws from the European Union at midnight on 29 March 2019 without having concluded an agreement on withdrawal from the European Union […] the Supervisory Authority may determine, in order to prevent disadvantages for the capacity of financial markets to function or for their stability, that the [passporting] provisions […] are to be applied accordingly, fully or partially, for a period of up to 21 months following the time of withdrawal, to companies based in the United Kingdom of Great Britain and Northern Ireland that on 29 March 2019 conduct banking business or provide financial services in Germany through a branch in Germany or by providing cross-border services [under the passporting regime]. [This] only applies to financial transactions that are completed after 29 March 2019 insofar as these transactions are closely connected to transactions that existed at the time of withdrawal.

As already mentioned here the FCA has been planning to take similar precautions for a hard Brexit. Now Germany is following.

The Draft Act, which needs to go through parliament before entering into force, authorises BaFin to extend the current passporting regime at its own discretion. BaFin may adopt a generally applicable rule for all institutions concerned or restrict it to individual supervisory areas that are highly affected. The transition period can also be shortened by BaFin. In addition, BaFin may attach conditions to its permission regime and abolish its measures at any time.

According to the currently proposed wording of the Draft Act, the transition period only applies to financial transactions concluded before Brexit. New financial transactions are only included if they are closely related to existing ones.

During the transition period, the companies concerned must prepare themselves to either apply for a respective license in Germany in order to to submit their German business to the supervisory regime for third countries, or to bring their German business to an end.

Transition period also proposed for the insurance sector

The Draft Act authorises BaFin to adopt a similar transition period for insurance undertakings in order to avoid disadvantages for policyholders and beneficiaries. This will enable insurance companies based in the UK to either transfer or terminate existing contracts within a reasonable timeframe, or meet the necessary prudential requirements for an orderly run-off of such contracts, where this is not possible.

Draft Act subject to European law

In case the EU comes up with a similar and uniform transition rule to protect the financial markets from any chaotic disruption due to Brexit, the EU rule will prevail.

How to Handle Brexit as a Fund Manager

By Dr. Verena Ritter-Doering of Curtis, Mallet-Prevost, Colt and Mosle LLP and Uwe Lill of GFD FINANZKOMMUNIKATION

The good old days seem to be over. Once Brexit gets real, the current passporting rules will no longer be available and new rules will apply for UK fund managers with EU clients. With or without equivalence, the UK will become a third country from an EU perspective, which raises three key questions that you will need to answer in order to chart the path forward: 1. Where is your fund located? 2. Where is your fund manager located? And 3. Where are you undertaking sales activities to address your EU clients?

To put it simply, there are seven different ways to serve your existing EU clients after Brexit, or to build new relationships with EU clients. We will show you in this Brexit map which route you will need to take to remain successful. In addition to considering the legal setup , it will be equally important to evaluate the way you communicate if you want to grow your EU customer base. For example, you must consider what should be taken into account when informing media in the unique German-speaking market.

For background information and details on this ongoing process (which may change on a daily basis!), please do not hesitate to contact us. We are very happy to share our expert knowledge with you.

Please click on this link to view the Brexit Tube Map for Fund Managers

FCA re-confirms temporary permission regime for inbound passporting EEA firms in case of a hard Brexit – the EU stays strict for now

Brexit will have an impact on the European and the UK financial market. Cross-border services will still be possible but the legal set-up will change and will get more complicated than the current passporting regime. Anyone who provides banking business or financial services in Germany without the appropriate license is committing a criminal offence. If charged, the person committing the criminal offence can become subject to a prison sentence (up to 5 years in case of intention and up to 3 years in case of negligence) or a monetary fine.

Outbound from the UK

If there is no implementation period when the UK withdraws from the EU, the UK will become a ‘third-country’ in relation to the EU and the current passporting regime will no longer cover the provision of financial services, payment services or the management and distribution of funds on a cross-border basis between the UK and continental Europe. Any UK person then providing any such business in Germany without the appropriate license, i.e., without a licensed set-up in Europe, will commit a criminal offence on a personal level.

The current political will in Europe does – at least at this stage – not cater for any easing of the strict criminal regime once the passporting rights of UK firms end due to Brexit.

Inbound to the UK

The FCA (backed by the UK Government) on the other hand just confirmed on October 10, 2018 that they are willing to protect the UK market by offering a transition period in case of a hard Brexit without a transition period. This will allow inbound EEA firms to continue operating in the UK within the scope of their current permissions for a limited period after the exit day, while seeking full UK authorisation. It will also allow funds with a passport to continue temporarily marketing in the UK while seeking UK recognition to continue to market in the UK.

The FCA expects the temporary permissions regime to come into force when the UK leaves the EU on March 29, 2019 and expects the regime to be in place for a maximum of three years, within which time, firms and funds will be required to obtain authorisation or recognition in the UK.

The FCA is currently consulting details of the rules they propose should apply to firms and funds during the temporary permissions regime.

What to do?

Firms will need to notify the FCA that they wish to use the temporary permissions regime.  This will be an online process and the FCA expects to open the notification window in early January 2019.  The notification window will close prior to exit day. Once the notification window has closed, firms that have not submitted a notification will not be able to use the temporary permissions regime. The FCA will then allocate firms a period (‘landing slot’) within which they will need to submit their application for UK authorisation.  After exit day, the FCA will confirm firms’ landing slots so they can start to prepare their applications. The first landing slot will be from October to December 2019 and the last will be from January to March 2021.

The regime will work in a similar way for EEA investment funds with fund managers notifying the FCA of the funds they want to continue to market in the UK.  As with firms, the FCA expects to start accepting notifications in early January 2019 and the notification window will close prior to exit day. Once the notification window has closed, fund managers that have not submitted a notification for a fund will be unable to use the temporary permissions regime for this fund and will not be able to continue marketing the fund in the UK.

It needs to be seen if the EU will align its supervisory authorities to a similar practice to ease disruption of the financial markets, should no deal be reached, and the UK will leave the EU on March 29, 2019.