Financial services and Brexit: a certain uncertainty

The immediate aftermath of the UK’s vote to leave the EU reflected the oft-repeated mantra that financial markets hate uncertainty with the value of the pound, plunging around 15% against the dollar to a 30 year low, acting as a proxy for wider market sentiment.

  • By Morrison & Foerster
  • 22 Dec 2016
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The immediate aftermath of the UK’s vote to leave the EU reflected the oft-repeated mantra that financial markets hate uncertainty with the value of the pound, plunging around 15% against the dollar to a 30 year low, acting as a proxy for wider market sentiment.

Markets have subsequently stabilised, partly supported by action from the Bank of England and a surprisingly swift conclusion to the immediate political maelstrom with Theresa May being elected to replace David Cameron as prime minister and making it clear at an early stage that the UK would not be rushing to the EU exit door without first planning its escape route.

Recent economic data has continued to calm markets indicating that the vote for Brexit has not yet acted as a catalyst for some of the predicted doomsday scenarios. That said, global market confidence remains fragile and the potential for a prolonged period of volatility endures. 

In a recent speech at the Conservative party conference, Theresa May confirmed her intention to serve the “Article 50 notice” on the EU by the end of March 2017.  That action will start the clock running on a two year process that will have profound consequences and which at its end will, absent an agreement to the contrary by all member states, see the UK cease to be a member of the EU by 2019.

At the recent G20 leaders’ summit in China, the Japanese government took the unprecedented step of issuing a memorandum containing a “message” to the EU and UK setting out their concerns and expectations as to the Brexit process.  It highlighted the damage that uncertainty could cause to global markets in contracting trade, investment and credit.  While focused on consequences for Japanese businesses, the messages in the memorandum should resonate among many other countries with significant interests in the EU, not least the US. 

The passport issue

The Japanese memorandum covers many relevant issues, but the potential impact of Brexit on the provision of financial services, freedom of cross-border investment and movement of capital runs through it.  A key area highlighted is the desire for the UK to continue to benefit from the “single passport” for financial services that operates within EU member states, whereby a firm that obtains authorisation to carry out a particular financial activity or service in one EU member state can carry out that activity or service in other member states without further authorisation.  In reality, there is no single EU passport for financial services but the matter is dealt with separately in relation to each piece of relevant legislation.

Whatever the wider international sentiment, it currently seems doubtful that the UK will be able to maintain its current position in relation to passporting.  Theresa May has already indicated that the UK will not pursue one of the existing models in place between the EU and a non-member state and will seek its own bespoke arrangement.  Maintenance of its current position in relation to passporting would almost certainly require the UK to continue to make substantial contributions to the EU budget and to be bound by most elements of EU law, including accepting free movement of people from EU member states.  These were among the biggest concerns highlighted by Brexit supporters and during her conference speech, Theresa May made it clear that regaining sovereignty and control over immigration would be crucial elements for the UK in its exit from the EU.

There are, however, other avenues that can be pursued.  Many pieces of relevant EU financial services legislation enable firms located in non-EU jurisdictions to perform relevant services and activities, often on a pan-European basis, where the EU Commission has determined regulation in the entity’s home jurisdiction to be equivalent to relevant rules in the EU.  

Equivalence questions

Although such determinations have so far taken considerable time, the UK is in a unique position as at the immediate point of exit, EU law will form part of UK law and therefore be, as a matter of fact, equivalent.  It should not be controversial for the UK to maintain the bulk of EU financial regulation then in force as much of it derives from international accords and G20 agreements and the UK has had an important role in the development of much existing EU law in this regard. However, not every piece of EU financial regulation includes equivalence arrangements, including legislation relating to the provision of financial services to retail investors and new proposed rules relating to securitization.

Having regard to the importance of financial services to the UK economy, this area is expected to form a central element of the negotiations with the EU. Other free trade agreements entered into by the EU, including with Canada and South Korea, took many years to negotiate and did not cover financial services in any detail, so it seems unlikely that a comprehensive arrangement could be reached between the EU and the UK in two years. An interim arrangement where the EU Commission provides an immediate equivalence determination where it can and transitional arrangements are agreed in other fundamental areas is more realistic.

There should though be no expectation that this process will be easy, transparent or certain.  There will be pressures from many EU jurisdictions against giving the UK too favourable a deal. Upcoming elections in France and Germany may also muddy the waters.  Matters such as the future free movement of EU citizens within the UK and whether the UK can be maintained as a clearing centre for the euro (both highlighted as important objectives in the Japanese memorandum) are likely to be contentious. 

A desire from the wider international community for the process to be open and transparent is also unlikely to materialise. The UK government has already indicated that it will not offer a running commentary as to its negotiating position and it is unlikely that either side will want to show their hand publicly before or during the process. Therefore, one of the few certainties about the process at the moment is that both it and the outcome are uncertain.

  • By Morrison & Foerster
  • 22 Dec 2016

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 66,188.03 223 8.88%
2 JPMorgan 54,703.62 214 7.34%
3 Bank of America Merrill Lynch 48,042.32 157 6.45%
4 Barclays 43,518.03 123 5.84%
5 Goldman Sachs 39,790.19 103 5.34%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Deutsche Bank 9,317.17 12 13.67%
2 SG Corporate & Investment Banking 7,508.63 11 11.02%
3 Goldman Sachs 5,773.27 11 8.47%
4 Citi 4,606.54 14 6.76%
5 BNP Paribas 2,914.62 14 4.28%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Goldman Sachs 2,432.15 11 12.88%
2 Credit Suisse 1,641.59 6 8.69%
3 JPMorgan 1,527.50 8 8.09%
4 Deutsche Bank 1,424.25 10 7.54%
5 Citi 1,285.41 7 6.81%