How to prepare your business in case of a 'no deal' Brexit

With only a matter of weeks until the UK is expected to leave the EU, businesses across many sectors are turning up the volume on their opposition to a ‘no deal’ exit.

Bruce Stephen, head of banking and financial services at Brodies

At the same time, businesses should be thinking about how they can prepare for ‘no deal’ becoming a reality. For an industry so heavily regulated as financial services, leaving arrangements to the last minute is not an option. Indeed both the UK and rEU regulators have all been at pains to stress that firms should have contingency plans in place. EY recently reported that financial services companies have moved almost £800 billion of assets to Europe, demonstrating that plans for operating in EU jurisdictions post Brexit are advanced.

There has been a wealth of new regulation in recent months which will impact financial services firms. A clear understanding of how these provisions inter-relate and indeed under which Brexit scenario they are intended to bite is important.

The recent detailed proposals of the FCA and HM Treasury for the marketing and management of investment funds following EU withdrawal illustrate the complexity well.

Provisions include a temporary permissions regime allowing managers who are marketing existing funds before the withdrawal date to continue to market those funds in the UK for a limited period of three years, with some limited scope for extension. However, the regime only applies to existing funds and, with some exceptions, if an additional fund vehicle is added at a later date this will fall into a different regime.

There is also a parallel temporary permissions regime allowing UK based management activities of EEA firms to continue for a three year period whilst firms apply for UK authorisation. However, if firms do not want to continue with a UK authorised operation after Brexit for new business, there is a separate regime for those who want simply to run off existing business. Firms will need to assess which is more appropriate for them.

Turning to the retail funds sector, legislation provides that UK managed UCITS-type funds (the type of liquid fund which can be distributed to retail investors throughout the EU at present) will no longer fall within the EU UCITS regime. If there is a no-deal Brexit there will be a new and separate UK only regime for such funds effective as from the withdrawal date. This will mean that it will no longer be possible for UK UCITS to have non-UK managers, trustees or depositories, As regards investments, there has been some softening provisions to the “UK only” rules which have replaced the previous “EEA only” regime, allowing continued investment in EEA assets and the continued use of EU settlement accounts to give effect to investment mandates.

This legislation (and the related guidance) has been prepared assuming that the UK will leave the EU on 29 March 2019 without any transitional deal. If there is a Brexit deal, it is expected that this will include some continuation of the status quo for a transition period (to at least the end of 2020). After that the rules may or may not differ from what is in the draft no-deal regulations depending on what is agreed with the EU.

For our clients, ensuring that they have the bases covered as far as possible is essential, irrespective of the outcome of the political debate and indeed of further negotiation with EU. We are following closely political developments, and also the ongoing regulatory consultations around how differing Brexit scenarios would be implemented as a practical matter. Drawing on this and the insights we have gained from helping clients with their plans, we have developed Brexit preparedness checklist, which can be accessed on our website, that allows businesses to assess how ready they are for Brexit.

For more information, head to the Brodies website