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.

EBA emphasises again that Brexit planning should advance more rapidly

In our recent blog article Risiken für den Finanzmarkt durch Brexit – Die europäischen Aufsichtsbehörden legen Standard für die EU-27 fest we gave an overview of the opinions and reports published by the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA) and the European Insurance and Occupational Pensions Authority (EIOPA), together the European Supervisory Authorities (ESAs), on the standards the ESAs expect of market participants within the EU post Brexit.

On Monday this week, the European Banking Authority (EBA) published a further opinion on preparations for the withdrawal of the UK from the EU. The opinion concerns the activities of credit institutions, investment firms, payment service providers and e-money institutions preparing for Brexit and is addressed to the national authorities, the ECB and the Single Resolution Board. EBA’s view should also be taken seriously by market participants since EBA expects the national authorities to ensure that financial institutions are preparing adequately for Brexit. Two years after the Brexit referendum EBA emphasizes that the recent political agreement on a transition period until end of 2020 does not provide any legal certainty until a withdrawal agreement is ratified at the end of the process for the departure of the UK from the EU. EBA points out that in their opinion there remains a material possibility that – despite best efforts on both sides – a ratified withdrawal agreement will not be concluded, in which case the UK would leave the EU on 30 March 2019 by operation of law without a transition period.

Without a ratified withdrawal agreement and thus without a transition period, the UK will become a third country for the purposes of the EU’s legal framework in March 2019. Through its engagement with the national competent authorities EBA expressed its worry that contingency planning and other preparations undertaken by financial institutions in UK as well as in the EU-27 should advance more rapidly. Although the political process is still ongoing and will hopefully lead to an agreement after all, EBA is adamant that financial institutions should not rely on public sector solutions, as “they may not be proposed and/or agreed”.

Financial institutions are required to assess the implications of Brexit for themselves and to prepare a suitable contingency plan. Some of the points explicitly mentioned in the recent opinion which need identifying and taking care of are:

  • direct financial exposures to and existing contracts with UK (for EU27 financial institutions) or EU27 (for UK financial institutions) counterparties;
  • reliance on UK (for EU27 financial institutions) or EU27 (for UK financial institutions) financial market infrastructures, including central counterparties (CCPs) and related ancillary services;
  • the storage of data in, and transfer of data to, the UK (for EU27 financial institutions) or the EU27 (for UK financial institutions); and
  • reliance on funding markets in the UK (for EU27 financial institutions) – including for issuances of instruments eligible for minimum requirements for own funds and eligible liabilities.

In case a financial institution still requires a new license to carry out business in the EU-27 post Brexit, the application should have been filed before the end of June to receive a timely authorisation prior to 30 March 2019.

Another focus is customer communication. Financial institutions are expected to ensure that they have assessed their obligations to their customers and the continuity of services and contractual commitments. Communication with customers should be sought as early as possible and by the end of 2018 at the latest.

One day after the publication by EBA, BaFin re-published EBA’s newest opinion on Brexit on its own website.