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March 2021

Post-Brexit, Financial Sector Still Seeking Answers. Here’s What We Know

One might have thought an industry employing over 1 million people – and accounting for more than 10% of the UK’s tax revenue – would have received more attention in Brexit trade talks than fishing rights.

The financial services sector, however, took a back seat to EU fishing boats, sowing uncertainty for the industry writ large. More than a month after UK and continental negotiators finalized their divorce agreement, open questions abound. For instance:

  • Which areas will be granted “equivalence” by the EU, thereby granting UK financial firms market access?
  • What about the numerous areas (e.g., payment services, deposit taking, electronic money) that have no equivalency regime?
  • Now that “passporting” – which enabled a regulated entity to freely open branches and sell its products and services within the EU – has ended for the UK firms, how will they navigate potential roadblocks in setting up shop in the EU?
  • How might regulatory regimes between the EU and UK evolve and/or diverge – and what impact might they have on the broader marketplace?

The answers to these questions – and the ways in which financial services firms respond – will emerge in the coming months and years, with significant market implications in London and beyond.

Some big shifts have already taken place: back in September, the consultancy EY estimated that “financial services firms operating in the UK had already shifted about 7,500 employees and more than 1.2 trillion pounds ($1.6 trillion) of assets to the European Union.”

Meanwhile, talk of possible regulatory divergence is in the air. According to Bloomberg, the UK’s ability to liberalize certain rules is the country’s “one apparent bargaining chip” in the wider trade negotiations.

That said, in many ways it might be in everyone’s best interest not to make any sudden moves. Aside from passporting, initial steps towards equivalence decisions, and some technical matters, it’s likely that we won’t be veering too far from the status quo in the next year or two. After all, the UK remains a draw for its language, commercial legal system, and human capital, while the EU represents a massive market.

Nothing, however, is certain, particularly given the political tensions at play. Yet while it remains to be seen to what extent the financial services industry will be impacted, there are crucial pieces of information business leaders need today in order to prepare for an uncertain tomorrow.

In what follows, we’ll delve into that critical information for four key financial services sectors: banking, insurance, capital markets, and private funds.


Despite the growing prominence of financial centers in continental Europe, the UK will remain a vital cog in the global banking machine, albeit in a different way.

“A few years ago, if a firm wanted to launch a new product or service across Europe, it would often just set up shop in the UK and nowhere else,” says Max Savoie, a London-based Sidley partner. “This was partly because of the language, expertise, and legal system, but also because London was the only real hub. Today, without the benefit of EU passport rights, firms will generally have to establish a presence outside the UK if they want to service the EU market.”

The big players have already done this and obtained the regulatory licenses they need in the EU. But with Brexit and the transitional period officially over, now is when the rubber meets the road, as local regulators will start looking at those new business models and ask some tricky questions.

For instance, they’ll be scrutinizing whether firms have enough substance (staff, intellectual capital, authority, etc.) present in the EU, and whether they’re actually using the licenses they’ve obtained. They’ll also be thinking more carefully – and perhaps be more assertive – in relation to the territorial application of their rules, such as when a cross-border service from the UK into the EU is subject to local licensing and conduct requirements.

“Say you’ve set up a licensed entity in Ireland,” Savoie says. “If you’re looking to use that entity to service customers across the EU, but you only have five employees there – and most of the strategy and customer-facing activity is going on in the UK – is that a problem? It certainly could be.”

Broadly speaking, there’s no avoiding the challenges of navigating a new jurisdiction, be it forming relationships with new regulators, coming to grips with new rules, or setting up arrangements with new service providers.

Where an EU entity relies on intragroup services from a UK affiliate, such as customer or anti-money laundering support, this needs to be properly documented and in compliance with applicable outsourcing rules. That means giving the EU entity effective control and supervisory rights, and ensuring it is the one actually providing the regulated customer-facing services – which may be a struggle for some firms.

For certain banking services, there are workarounds to engage the license of a local third party to be used under its supervision and control. This isn’t a risk-free approach, however. “Companies could lose control of the customer relationship,” Savoie cautions. “And it’s not free.”

Broadly speaking, there’s no avoiding the challenges of navigating a new jurisdiction, be it forming relationships with new regulators, coming to grips with new rules, or setting up arrangements with new service providers.

In navigating these challenges, Savoie underscores the importance of understanding local regulators’ rules, expectations, and day-to-day compliance requirements. He also highlights the importance of documentation. “If you take a reasoned approach and document why you’ve made certain decisions, you’ll generally be in a much better situation should issues arise,” he says.

What’s next

Though for now most firms are rightly focused on operationalizing their Brexit plans and sorting out local compliance, they should be aware of the possibility of regulatory divergence in months and years to come. The EU will soon start issuing many new regulations and directives – on everything from cryptocurrency to payment services to new standards for banks and other providers.

“Since the UK has historically taken a more flexible, principles-based approach, it may decide to diverge from some of the more technical aspects of select EU regulations,” says Savoie. “Particularly in certain areas, like sustainable investments, cryptoassets, and payments.”

Ultimately, though, Savoie thinks it’s unlikely that London will become – as some have suggested – a free-market haven, “as there’s still a strong rationale for maintaining robust regulatory standards.” That said, some divergence, especially amid the EU’s regular legislation reviews, is certainly possible – and firms should keep a close eye on this moving forward.


Like other financial services sectors, the insurance industry – encompassing insurers, reinsurers, and brokers – undertook major projects to ensure they would be fit to operate in a post-Brexit EU without passporting rights. Some with a scant presence in the EU exited altogether, while others set up EU subsidiaries.

Rather than a hub and spoke approach, with one central hub in the UK, insurers are now employing a twin operation system – with a UK authorized company and a separate insurance company based in the EU that has the benefits of passporting.

“We’ve seen many insurance business transfers out of the UK into new EU companies or existing subsidiaries to make sure the business is in the right place, and some of that in reverse as well,” says Martin Membery, co-leader of Sidley’s global Insurance group.

Questions about equivalence present the greatest uncertainties for insurance groups based in the UK and those with UK subsidiaries.

For those who have exited the EU altogether, there is some uncertainty around their ability to continue servicing business they’ve already underwritten on the continent. However, the European Insurance and Occupational Pensions Authority (EIOPA), which provides guidance to regulators, has pushed for pragmatism in this respect.

“They’ve essentially stated that local regulators should be realistic – and there’s a high likelihood that even regulators who don’t follow EIOPA guidance wouldn’t take enforcement action against an insurer for paying a claim to an EU-based policyholder,” Membery notes. “Still, it’s prudent for insurers to obtain local legal opinions for specific countries in which they’re running off their business.”

What’s next

Questions about equivalence in three key areas present the greatest uncertainties for insurance groups based in the UK and those with UK subsidiaries. But they also present potential problems for other EU-equivalent countries (e.g., Bermuda, Switzerland, Japan), who fear that if the UK does not secure equivalence, the standards being applied by the EU to justify such a stance might in turn impact other countries’ equivalence assessments next time they are reviewed by the EU.

Here’s a breakdown of each regulatory area, what’s at stake, and how organizations might prepare.

Group capital

Granting group capital equivalence to a third country essentially means the countries involved would respect the other’s regime in terms of assessing the amount of capital an insurance group needs to hold for a subsidiary in the third country.

It’s an interesting area, according to Membery, because granting the UK equivalence would actually be a benefit to EU-headquartered insurance groups.

“For EU groups with a UK subsidiary, group capital equivalence would mean the EU group would not have to hold additional capital over and above the capital requirements for their UK entity,” Membery says.

Group supervision

This area involves not only the credibility and authority of an international or UK insurance group’s supervisor in EU jurisdictions, but could also potentially impact the capital that group is required to hold.

“An EU regulator looking at an insurance group based in a non-equivalent jurisdiction could impose additional capital charges if they feel the solvency regime for that third country isn’t as strong as Solvency II,” says Membery, referencing the EU directive that codifies insurance regulation; the UK currently abides by it. “While, for instance, they might not be legally able to impose those charges on a UK company, they could – if the UK isn’t granted equivalency – impose them on any EU subsidiaries within the group.”


Reinsurance equivalence creates a level playing field: in a nutshell, it means the EU won’t be allowed to impose additional requirements on reinsurers in equivalent jurisdictions.

At the moment, and with the notable exception of Germany, most EU member states don’t impose local presence or compulsory collateral requirements on non-equivalent reinsurers. But without equivalence, the EU can change their rules at any time; they could declare, for instance, that going forward, non-equivalent reinsurers do have to set up a locally regulated branch or post additional collateral.

“It’s really important for the UK to secure reinsurance equivalence to create a stable footing moving forward,” says Membery. “While international groups with UK subsidiaries – including many U.S.-based reinsurers – could potentially switch their underwriting operations to equivalent locations (or to the U.S., which benefits from the EU Covered Agreement), UK-centric companies could lose significant EU business should they not be granted reinsurance equivalence.”

While a lot may be at stake here, it would seem, at least on the face of things, that so long as the UK and EU remain under the current Solvency II regime, equivalence would be the logical step. But that, too, may begin to change.

“It would be bizarre for the UK not to be granted equivalence seeing as they’re operating under the same regime already,” says Membery. But the UK itself has an ongoing consultation about possible changes to its regime – for instance, around modifying risk margins – and the EU is looking at Solvency II as well.

“If the UK starts changing and/or if the EU makes changes that the UK doesn’t follow, that’s when regulatory divergence happens – and this divergence might strengthen the EU’s case for saying that the UK should not be granted equivalent status,” he says.

Capital Markets

The International Capital Markets Association is based in London for good reason: for decades, the City has been the main hub for capital markets activity outside of the U.S.; it regularly pushes the regulatory agenda.

Perhaps it’s no surprise, then, that – at least for the moment – it’s likely in everyone’s best interest to maintain the status quo to the greatest extent possible. The UK has basically on-shored the EU’s capital markets regulatory regime, and legal concerns – like those for issuers – involve modifying documents to reflect legal technicalities rather than instituting sweeping structural changes.

It’s not going to be in the EU’s long-term interest to deny European corporates access to London’s expertise and access to capital.

That said, there are a few areas more severely affected: UK-based underwriters, for example.

“They can’t perform their broker/dealer role in the EU any longer,” says Benedetta Pacifico, senior associate at Sidley in London. “If they want to push their product in the EU market, they’ll need separate licenses, and all of the major players have already sorted this with local authorizations for EU subsidiaries.”

Another issue relates to the passporting of prospectuses approved in one jurisdiction for use in another. Those selling equity products will face the steepest hurdles, as they’ll require both a UK and EU approved prospectus if they want to access a wide retail market. Bond issuers would also be well advised to establish EU finance subsidiaries to ensure access to European-wide asset purchase programs.

“The biggest purchaser of bonds is the European Central Bank,” says Pacifico. “So it’s important for bond issuers to be eligible for the ECB’s bond purchasing programs, in terms of backing and pricing as well as the simple fact that you’ll be able to sell much more because investors will trust the product. UK-based issuers wanting to raise funding in euro will likely want to set up a finance vehicle in the EU to ensure they’re eligible.”

What’s next

Despite suggestions that the UK might usher in a wave of deregulation as a form of leverage over the EU, the reality on the ground suggests a much more nuanced – and tempered – picture.

“Sure, the UK may want to regulate specific sectors in a way that might make it easier to raise capital, be it in fintech or green finance, or by relaxing the listing and prospectus-related regimes as recently suggested by Lord Hill,” Pacifico says. “But you can’t regulate in such a way that would cut off EU investors or dramatically reduce investor protection, which has long been a selling point of the London market. At the same time, it’s also not going to be in the EU’s long-term interest to deny European corporates access to London’s expertise and access to capital.”

Though divergence may eventually take place, for now all signs point to continued collaboration. In the meantime, while Brexit might steal some of London’s capital markets thunder, the City remains a global powerhouse.

Private Funds

Unlike their retail counterparts where passporting is critical, private funds have been less impacted by Brexit and the loss of passporting rights.

As Stephen Ross, a London-based Sidley partner, puts it, “Some of our clients are already adopting a structured approach for non-EU private funds, either through private placement or the reverse solicitation regime, so they don’t always need the EU private funds marketing passport to raise the desired amount of capital.”

What’s next

The current situation is fragile: tensions around the universal use of private placement and reverse solicitation predate Brexit, and the EU has the power to make these methods more difficult for UK-based fund managers.

“The EU may want to have more oversight over the fund managers placing private funds in Europe, so they may push for more feet on the ground in their own member states,” says Ross. “But that creates new tensions. For instance, if you’re an international fund manager and your subsidiary in London is working on, say, a growth strategy in Hong Kong, it may be that having sufficient substance in say Dublin with knowledge of the asset class and region is unrealistic.”

Another notable development is the suspension (following Brexit) of an initiative in the EU’s Alternative International Fund Managers Directive (AIFMD), which would have, if it had been implemented, allowed funds located in jurisdictions outside the EU the benefits of passporting should they adopt the AIFMD’s standards.

“That would be a positive scenario for UK private fund managers and EU investors who want access to the best managers,” says Ross. “However, the EU has suspended the initiative pending the outcome of Brexit discussions as they relate to financial services. If they facilitate other countries on equivalence, like the U.S. and Channel Islands, it would be hard to deny the UK the ability to enjoy access as it is, by definition, equivalent, having been subject to the AIFMD until very recently.”

Tensions around the universal use of private placement and reverse solicitation predate Brexit, and the EU has the power to make these methods more difficult for UK-based fund managers.

This (somewhat politically charged) environment may ultimately make it difficult for private fund managers in the UK to raise enough EU capital – especially smaller, non-institutional shops, for whom putting significant resources into establishing an entity in the EU would be a significant hurdle. As of now, these players can potentially use EU-based AIFMD platforms should they need to raise EU capital under the passport. However, the requirements for such an arrangement could tighten.

“At the moment the EU test is basically: can the manager (or EU-based third-party platform) conduct portfolio and/or risk management from within the EU,” explains Ross. “Most firms can demonstrate they can. But where new regulations could really be impactful is in limiting the amount of management fees received in the EU that can then be sent back to London for services provided outside the EU. EU regulators could essentially say, ‘If you’re really doing valuable business here, why are most of the fees going back to London?’”

The good news is that the EU process can take time: Ross says there should hopefully be facilitating legislation for private fund managers available for years, not months. All the same, it should raise the alarm for relevant stakeholders, who would do well to stay abreast of new developments and make preparations, today.

This article has been prepared for informational purposes only and does not constitute legal advice. This information is not intended to create, and the receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this without seeking advice from professional advisers. The content therein does not reflect the views of the firm.
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