Has Ireland benefited from Brexit?
There is little doubt that the Financial Services Industry will experience uncertainty as a result of a no deal Brexit. The Financial Services Industry has attracted high levels of regulation in recent years and most of this regulation has been driven at an EU level. The initial message conveyed in the UK was that regulatory red tape would be cut and financial services would thrive. However, this message began to wane as it became apparent that there would need to be some sense of equivalence if the UK was going to be granted access to EU markets. EU regulations have been strenuous on European member states, but this cumbersome approach has contributed to a stable and transparent financial services sector with specific regulation focused on sub sectors of the industry. Banking is policed by CRD IV, Insurance is overseen through the imposition of Solvency II, and fund management is controlled through AIFMD and UCITS. All these pieces of legislative framework have ensured a stable and more transparent financial services sector across Europe.
When Brexit began to become a serious reality, the million-dollar question was whether Ireland would be a net beneficiary from the relocation of financial services arising out of the uncertainty that developed from Brexit. Ireland seemed like the ideal location given its proximity to mainland Europe. When coupled with its tried and tested regulatory system in financial services policed by the Central Bank of Ireland, a legal system with many similarities to that of the UK and the offering of a skilled English speaking labour force and developed infrastructure, it was almost a certainty that Ireland would benefit. As of October 2020, this statement holds true.
In a recent report from data provider S&P Global Market Intelligence, it was noted that Ireland has attracted more global financial institutions relocating from the UK ahead of Brexit than any other EU member state. The numbers show 35 global firms have moved to Ireland since the 2016 vote, compared to 22 to Germany and 20 to each of France and Luxembourg. While Ireland has benefited in terms of overall numbers, Germany has attracted a larger amount of the significant banks.
Passporting and equivalence
The UK’s decision to leave the EU is likely to have significant consequences for UK credit and financial institutions currently providing services to customers located in EU Member States on the basis of EU passports. While Passporting rights for UK institutions could be saved if the UK ultimately joined the European Economic Area (EEA), or entered into sector-specific bilateral arrangements, this cannot be stated with any certainty pending the outcome of the Article 50 negotiations.
Once the UK leaves the single market at the end of the Transitional Period, firms based in the EEA will no longer be able to use their passporting rights to access UK markets and vice versa (unless the agreement for future relations provides for enhanced access rights such as equivalence
To date, the UK and EU authorities have been focused on implementing measures to mitigate the practical impact of the loss of market access rights in the event of a no-deal Brexit. A number of the EU27 have proposed or implemented national transitional arrangements for the no-deal scenario that would help UK firms and funds cross-border marketing or selling into Europe. However, many of these are short term in nature, and are limited to the running off existing business.
For EU27 firms and funds that currently passport into the UK, alongside the PRA and FCA being granted temporary transitional powers to phase in on-shored requirements, the UK produced two complementary regimes to provide stability in the event of a no-deal. The first was the temporary permissions regime (TPR) designed to enable EU firms to continue to operate in the UK based on their existing passporting rights for a limited period after a no-deal exit. The UK also established the financial services contracts regime (‘FSCR’), a mechanism for firms that fall outside the TPR to run off existing contracts and conduct an orderly exit from the UK market.
The European Commission has confirmed that investment banking will not be granted equivalence. The only major agreement has been on the clearing of euro derivatives. The EU approved clearing houses in London to continue clearing euro transactions for EU-based clients amid fears that stopping them would cause huge disruption for financial markets.
A missed opportunity
On 21 October 2020, the UK government published its Financial Services Bill. The bill sets out how businesses will operate and the regulations they will have to adhere to once the UK formally leaves the EU.
In order to continue to trade in the EU, the UK needs an 'equivalence ruling' to replace the current 'passporting' regime which allows members to trade freely across Europe.
The European Commission has confirmed that investment banking will not be granted equivalence. UK banks have begun to face the reality of a no deal Brexit and began establishing subsidiaries across Europe. Undoubtedly, the UK had an opportunity to market itself as an offshore financial centre outside the EU while continuing to provide services for other EU states but the so-called European passport, which allows banks to look after big corporate clients on the Continent, has been suspended and instead of equivalence it is now up to individual institutions to apply for their own licences. As a result, many of the banks have begun making contingency arrangements. Goldman Sachs has established a bigger presence in Frankfurt, HSBC has expanded in Paris and others have chosen Amsterdam and even Dublin as a base to keep licences alive in the EU.
Time is of the Essence
We are now less than two months out from a no deal scenario and as the clock ticks down the uncertainty increases. Ultimately, the impact on the financial services sector in Ireland will depend on the relationship agreed on between the UK and the EU.
Should fresh talks be successful, the EU and the UK could opt for the so-called “Norwegian Option”, which would mean the UK becoming a member of the EEA and gaining access to the single market without being a full member of the EU. If the UK did become a member of the EEA, the passporting rights of financial institutions would be preserved.
Alternatively, the EU and the UK could agree on the “Swiss Option”. Switzerland is not a member of the EU or the EEA. However, it has negotiated a series of bilateral treaties governing its relations with the EU. The Swiss model is structured with some 120 bilateral agreements with member states and limited access to the single market. The Swiss model would not provide the guarantee of single market access that EU or EEA membership would provide. Therefore, UK financial institutions may lose their current passporting rights and visa versa.
Currently the most likely option is ‘the Australian Option’. This is somewhat misleading. While Australia does trade with the EU on World Trade Organisation (‘WTO’) rules, it already has several agreements in place. Agreements which took time to agree over a period much longer than two months. Similarly, the United States trade with the EU on WTO rules and has a number of agreements in place covering a wide range of areas. While the UK maintain they would like to agree a ‘Canadian Style’ trade deal with the EU, this appears unlikely. As a result, the so-called ‘Australian Option’ looks like the most likely outcome. This would involve a sudden departure without seeking to retain membership of the EEA or negotiating bilateral agreements. This would mean that UK financial institutions would lose their current EU passporting rights and vice versa.
The more straightforward route to continued access to the single market in financial services is to establish one or more subsidiaries in EU Member States and to transfer any existing EEA business to that entity. Once authorised, the new EU entity could use the EU’s passporting regime to provide services across the EEA.
The financial services industry in Ireland has already benefited from Brexit. The numbers are clear. However, the future remains uncertain until a trade agreement is signed. The type of agreement is of significant important to financial institutions both in the EU and the UK. If nothing is put in place by 31 December 2020, restrictions will kick in for UK financial institutions trying to enter cross border transactions in Europe and for Irish and other Member States operating in the UK market. All eyes will now be focused on the restarted trade negotiations in the hope that an agreement can be reached to minimise the increasing levels of uncertainty.
If you have any questions in relation to the above, or if you would like to discuss this topic further, please contact a member of the Mazars corporate tax team below.