The main effects of a Brexit in the financial system, the structures, operations and services provided to it, are examined in a study of Economic Public Law Professor at the Law Faculty of the National University of Athens and the general secretary of Hellenic Bank Association Christos Gortsos. The study commissioned by the European Parliament’s Economic and Monetary Affairs Committee on the «Potential Concepts for the future EU-UK Relationship Financial Services» assesses the key impacts of the United Kingdom’s exit from the European Union on the financial system and its infrastructures, on financial firms and financial services under three alternative concepts for the future EU-UK relationship. In addition to the impact on the ‘passporting rights’ of financial firms, particular emphasis is given to the impact on the regulatory framework governing i.a. credit institutions under a ‘third-country status’ scenario for the UK, the impact on payment systems and market infrastructures, as well as to certain aspects of the EU institutional framework governing the monetary and the financial system could be affected.
This document was requested by the European Parliament’s Committee on Economic and Monetary Affairs.
The study assesses the key impacts of the United Kingdom’s (UK) exit from the European Union (EU) on the financial system and its infrastructures, on financial firms and on financial services under alternative potential concepts for the future relationship between the EU and the UK. Moreover, it explores the impact of the UK’s exit from the EU on the EU institutional framework governing the monetary and the financial system.
The main alternative options which could govern both, the UK financial firms operating in the EU and the EU financial firms operating in the UK are explored (application of GATS bilateral trade agreements; and membership of the European Economic Area (EEA). The difference between financial firms established in the form of subsidiaries and established in the form of branches is explained because the EU single passport and hence the EU freedoms of establishment and to provide services are important to the branches or the provision of services cross-border without establishment. The passporting issues are a very important aspect, but not the only legal issue arising from the UK’s exit from the EU. For this reason, the study is not confined to passporting issues, but also assesses the impact of the UK’s exit from the EU on regulatory aspects in regard to credit institutions, such as micro-prudential supervision, reorganisation, resolution and winding-up, as well as participation in deposit guarantee schemes. The impact on payment systems and market infrastructures under a ‘third country’ regime is also examined.
Chapter 1 (‘The conceptual framework’) lays the building blocks of the study. In that respect, it firstly reviews the main modes of supplying financial services at international level. Then it draws attention to the wide perimeter of financial firms and trading venues to be affected by the future EU-UK relationship in the field of financial services, since such services are currently provided by a wide range of financial firms under the conditions laid down in EU law. Finally, it presents the position of the Bank of England and other UK administrative financial authorities within the international institutional framework governing the financial system as well as their importance, taking into account that several legal acts of EU financial law are based on the work of these international fora, hence it can be expected that the UK will continue, after its exit from the EU, to comply with their main provisions.
The first section of Chapter 2 explores three main concepts for the future relationship between the EU and the UK:
- the global regime of a third country under the General Agreement on Trade in
Services (GATS) of the World Trade Organization (WTO);
- bilateral trade agreements; and
- membership of the European Economic Area (EEA).
The analysis then turns to the impact on financial firms, markets and infrastructures under the alternative concepts. Undoubtedly, the main issue is the impact on the ‘passporting rights’ of UK and EU financial firms, i.e., the continuation or discontinuation of UK financial firms’ right to have access, through branches and provision of services without (permanent) establishment, to the EU single market by virtue of the single passport under the different concepts which could govern the future EU-UK relationship. The same applies also to EU financial firms as to their activities in the UK financial marketplace. An aspect of legal (and strategic) importance is that this impact does not significantly affect the legal position of subsidiaries established by UK financial firms in the EU and the subsidiaries established by EU financial firms in the UK (apart from business considerations which are beyond the scope of this study), since in both cases subsidiaries remain to be subject to the national legislation of the country in which they are established.
The emphasis in Chapter 3 is given to two equally important issues:
- the first is the impact on the regulatory framework governing UK and EU credit institutions under a ‘third-country status’ scenario for the UK, including their microprudential supervision, reorganisation, winding-up and resolution, as well as their participation in deposit guarantee schemes, and
- the impact on payment systems and market infrastructures.
In this respect, the framework governing the micro-prudential supervision of the EU branches of UK financial firms and the UK branches of EU financial firms, their reorganisation, resolution and winding-up, as well as the participation of credit institutions’ branches in deposit guarantee schemes and the participation of credit institutions’ and investment firms’ branches in investor compensation schemes will also be affected, almost to the same extent as their ‘passporting rights’. To a much lesser extent implications will also be evident for the subsidiaries of these financial firms. In addition, under the scenario of the third-country regime, another significant aspect under examination is the impact on payment systems and market infrastructures, including the EU large-value payment system ‘TARGET2’, the ‘Single Euro Payments Area’ (SEPA), and the financial infrastructures for clearing and reporting transactions, taking into account the huge volume of transactions settled through payment systems, the crucial role of market infrastructures for the smooth operation of financial systems, and the significance of the interconnectedness between payment systems and market infrastructures.
Chapter 4 (‘Institutional aspects’) explores the aspects of the EU institutional framework governing the monetary and the financial system to be affected by the future EU-UK relationship in financial services. After a brief review of the implications concerning the European Investment Bank (EIB) and the four ‘Comitology Committees’, the study focuses on the impact of the UK’s exit from the EU:
- on the capital of the European Central Bank (ECB) and decision-making within its
General Council, and
- the two pillars of the European System of Financial Supervision (ESFS), i.e., the European Systemic Risk Board (ESRB) and the European Supervisory Authorities (ESAs).
The impact of the UK’s exit from the EU is expected to be of substantial significance for the financial system, its infrastructures, financial firms and financial services both in the UK and in the (other) EU Member States. This study does not cover the entire diversified range of implications of the UK’s exit from the EU. Aspects not dealt with include, e.g. the impact on consumer protection in the field of financial services, on anti-money laundering arrangements, and on data protection.
In addition, the focus of the analysis in Chapters 2 and 3 is mainly on passporting and the regulatory impacts on credit institutions (and to a certain extent on investment firms).
Nevertheless, it is expected that it lays the groundwork for further research into passporting and the regulatory impact on insurance and re-insurance companies, as well as the regulatory impact on investment firms and other regulated financial firms in capital markets.
The main conclusions of the study are twofold. The first main conclusion is that the European regulatory framework provides a favorable regime in trade of services carried out in the region, including financial. Specifically, based on the principle of a “European passport”, a company which has its head office in an EU Member State may establish branches and / or offer cross-border services in any EU member country, since the authorities of a member state reception consider that the conditions laid down by the EU legislation are met. The European passport is one of the benefits arising from access to integrated common European market, which the UK could lose if the relationship with the EU acquired form of “third country”.
In this case, the British companies who intend to offer financial services in the EU will either choose to operate in subsidiary form in an EU member country and operating in the EU using the common passport through this subsidiary or should comply with different regulatory framework in each country, since the relevant legislation is not suitable for the implementation of a unified legal framework for third countries.
The second main conclusion of the study is that the British government involvement, the Bank of England and other British administrations in international organizations and in international financial fora, establishing the framework governing the financial system is a guarantee that the British financial system and the British financial legislation will continue to affect, be affected but also determined by international developments, in securing stability in the financial system. This could prove to be a safe haven for the future EU and UK relationship in financial services, to the extent that the financial system and financial legislation (other) EU member states are equally affected by international developments.