The Brexit vote has redefined our relationship with Europe but exactly what shape that will take in the future remains unclear. The current plan is to invoke Article 50 by the end of March and to pass the Great Repeal Bill placing all EU laws and regulations onto the British statute book.
While there will be intense political pressure to prevent a hard Brexit over the coming years, firms must start planning for a scenario that entails loss of membership of the single market.
The loss of the passporting has received the most media attention. In my own experience, the passporting system is far from perfect but its removal will have a disruptive impact on cross-border business.
Post-Brexit, the UK will become a third member state and firms wishing to undertake cross-border business will need to establish separately capitalised and authorised legal entities within another EU state. This will increase operating costs, introduce further complexity and lead to sub-optimal allocation of capital and liquidity resources.
Domestically focused firms may think they will be unaffected by the loss of passporting rights. However, they must consider the impact on Ucits funds.
The Ucits directive currently permits fund managers and fund administrators to be located in a different EEA state to where the fund is domiciled. Post-Brexit, Ucits funds distributed in the EU that have UK managers and administrators would need to be restructured and/or re-domiciled to within the EU.
This fragmentation of the pan-European business model will lead to increased operating costs. Firms may encounter reduced choice and increased fund charges.
Squaring the cross-border circle
Regulatory equivalence has been mooted as a potential solution for UK firms wishing to operate on a cross-border basis. This would permit the UK to access the single market if it can demonstrate equivalent regulatory standards with the EU. As the UK has been operating to these standards already, this should be entirely feasible.
This may be onerous in practice, however, as requests for equivalence require vetting by the relevant European Regulatory Authorities and subsequently by the European Commission. One of the key problems is that there is no timescale for this process to be completed.
Equivalence also has an uncertain tenor because it could easily be revoked if, for example, the UK’s regulatory framework begins to diverge from the EU’s in the future. A decision to dilute the remuneration code or change capital requirements could trigger such a move.
Becoming a Societas Europae has also been suggested as a way to navigate the challenges from the loss of passporting rights. An SE is a company registered in accordance with the law and corporate governance standards of the EU. It enables the transfer of registered offices across member states. A firm could set up or convert to an SE and simply move its registered office to the EU.
However, this is not a straightforward task, as full authorisation is still required in the new EU state. Additionally, sales and back office staff will also need to migrate to avoid tripping the EU regulatory perimeter, adding a human capital dimension to the issue. Firms will also still need a UK incorporated and authorised entity if they are to continue serving the UK market.
Conduct of business and consumer protection
Could a full withdrawal from the single market open up opportunities to reduce the regulatory burden and simplify the conduct of business rules?
Once the Great Repeal Bill is in place, the Government could re-craft laws and put in place UK equivalents. However, very few laws confer direct conduct of business obligations on firms. The source of these obligations is the FCA’s conduct of business rules.
The FCA’s rules are predominantly derived from its consumer protection objective. These are designed to encourage good business practice, promote good governance and improve the ability of consumers to make buying decisions.
It is difficult to envisage the FCA concluding that withdrawal from the EU means consumers now need less protection. At the 2016 FCA annual public meeting, chief executive Andrew Bailey stated: “We don’t expect to be distracted from our regulatory obligations, our objectives will not change and, as such, no one should expect a bonfire of regulation”.
While the debate about the shape of our future relationship with the EU plays out, firms can only plan on the basis of projected scenarios.
For those currently operating on a cross-border basis, the uncertainty is too great and they are already relocating or changing existing business models. Others without this impetus should start evaluating different operating models and explore EU states to operate from – an analysis that will need to consider a much broader set of factors, such as labour laws and tax regimes.
For domestically-focused firms, the regulatory framework remains the same. Current and future EU regulations must be adhered to and, in the event of Brexit-driven changes, one would expect a transitional period before the new framework comes into force.
Whatever the outcome of the negotiations and whoever turns out to be the winners and losers, the path ahead will be littered with uncertainty and challenging decisions.
Esrar Moitra is consulting director at Optima Regulatory Strategies