As the prospect of a no-deal Brexit looms nearer many firms have been implementing the final steps in their contingency plans to ensure there is minimal damage to existing contracts and client relationships.
Such plans include extending existing entities, transferring clients over to post-Brexit entities via repapering, and seeking new passporting authorisations.[1][2]
Preparing financial institutions for such a move has proved to be a reform of epic proportions with institutions facing great uncertainty. The risk of losing clients to competing EU27 firms and the prospect of ever-increasing resourcing costs to mitigate further risk, incites anxieties surrounding the stable future of U.K. financial institutions and threatens long-term relationships with EEA clients.
Passporting
The impact of Brexit is astronomical if we consider the potential loss of passporting rights and the extent of contingency planning that is required. Passporting is a valuable asset for multinational institutions since companies can eliminate costs incurred when wanting to continue business activities it currently has permission for in its home state, as well as continuing services between EEA member states.[3]
Even further, passporting privileges have been labelled ‘the foundation of the EU single market for financial services,’ for they allow for free trade between EEA states and reduce lengthy processes to obtain authorisation from each country they are wishing to conduct business with.[4] In gaining establishment and authorisation in one EU country, institutions can then do business and offer services across the EU, with the option to also open branches in other countries.[5] Such an authorisation can be viewed as a ‘firm’s financial services ‘passport’.[6] While there are regimes in place that allow for certain services to continue if the U.K. becomes a “third country”, these are limited in scope and decidedly less secure.[7] In light of this, without proper contingency planning there is a high chance that integral financial services could be jeopardised and whole business models rendered inoperative.
Repapering
One main form of contingency planning involves repapering clients to post-Brexit entities. Current legal contracts between the U.K. and EU27 firms is a widely contested issue as financial services must ensure all existing contracts remain valid or that they go through a replicate and amend process. The reason being, without an updated contract to reflect the migration to the relevant post-Brexit entity, contracts can become void, terminated or even worse illegal. Contingency planning for an ever-changing and complex event, however, is difficult and the scale of planning involved in repapering is considerable. Dealing with cross-border financial services contracts without a passport raises uncertainties and can be a blocker to maintaining existing contracts. For this reason, many financial institutions have adopted a worse-case scenario or “cliff-edge outcome” contingency plan to mitigate the loss of business and limit the number of new contracts for clients.
To enable continued supply of goods or services from the EU to the UK (or vice versa), contracts can go through a replicate and amend process, whereby the institution creates a EU27 licensed entity and repapers their existing clients to this entity without drastically changing the terms of the contract.[8] While repapering may seem like the best cause of action for its simplicity, it can also be viewed as a timely and costly undertaking since it involves outreaching to thousands of clients and an increase in employees’ time and company resources. Further, certain clients may view this undertaking as an opportunity to renegotiate existing terms. In this case, financial institutions will often have to consult legal experts, which again proves costly and timely.
To allow for quicker repapering of contracts, banks can adopt the Part VII Transfer which is a mechanism under Chapter VII of the law.[9] Part VII is a banking business transfer which allows institutions to transfer a large number of legal relationships with separate customers, instead of having to obtain individual customer consent.[10] This process means there is less likelihood for new contracts to be made and also limits the legal burden on clients and financial institutions.
JDX’s Role
One way in which JDX Consulting aids Brexit contingency planning is through our ability to place resources in often complex and time sensitive projects. As a global consulting company, we monitor the continuing impact Brexit may have on our financial institutions and train our consultants to be able to assist in paralegal duties, client outreach and repapering projects. We have designed, planned and executed effective strategies for Brexit in EMEA, APAC and US investment banks and our knowledge of various market and business platforms allows for smooth client migrations with accurate and fast results.
GOV.UK. (2019). Get ready for Brexit. [online] Available at: https://www.gov.uk/brexit?gclid=EAIaIQobChMIypy38PzA5AIVgbHtCh0D-wwcEAAYASAAEgKduvD_BwE&gclsrc=aw.ds [Accessed 8 Sep. 2019].
[1] Kraemer, D. (2019). Could a no-deal Brexit still happen on 31 October?. [online] BBC News. Available at: https://www.bbc.co.uk/news/uk-politics-49612757 [Accessed 8 Sep. 2019].
[2] Financialmarketstoolkit.cliffordchance.com. (2019). Financial Markets Toolkit | Brexit. [online] Available at: https://financialmarketstoolkit.cliffordchance.com/en/topic-guides/brexit.html [Accessed 8 Sep. 2019].
[3]Bankofengland.co.uk. (2019). Passporting. [online] Available at: https://www.bankofengland.co.uk/prudential-regulation/authorisations/passporting [Accessed 8 Sep. 2019].
4 Bba.org.uk. (2019). [online] Available at: https://www.bba.org.uk/wp-content/uploads/2016/12/webversion-BQB-3-1.pdf [Accessed 8 Sep. 2019].
[5] Investopedia. (2019). Passporting Allows EEA Registered Firms to Cross Borders for Business. [online] Available at: https://www.investopedia.com/terms/p/passporting.asp [Accessed 8 Sep. 2019].
[6] Investopedia. (2019). Passporting Allows EEA Registered Firms to Cross Borders for Business. [online] Available at: https://www.investopedia.com/terms/p/passporting.asp [Accessed 8 Sep. 2019].
[7] Investopedia. (2019). Passporting Allows EEA Registered Firms to Cross Borders for Business. [online] Available at: https://www.investopedia.com/terms/p/passporting.asp [Accessed 8 Sep. 2019].
[9] Home.barclays. (2019). Part VII Transfer | Barclays. [online] Available at: https://home.barclays/who-we-are/our-strategy/preparing-for-brexit/part-vii-transfer/ [Accessed 9 Sep. 2019].
[10] Barclays.co.uk. (2019). Preparing for Brexit. [online] Available at: https://www.barclays.co.uk/business-banking/brexit/ [Accessed 9 Sep. 2019].
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