IRELAND: POST-BREXIT FINANCIAL SERVICES

Ireland: Your Post-Brexit Passport to Europe Brexit will fundamentally alter the UK’s relationship with the EU and will have a profound effect on the landscape of financial services in Europe. Ireland is the logical relocation choice.

This paper considers the potential impact that Conduct Authority, published by the House of Com- mons Treasury Select Committee1, close to 5,500 sectors and explains why Ireland should be a logi- UK-registered entities rely on passporting to do Brexit may have on the main UK financial services- business in other EU countries. cide to transfer part (or all) of their business from thecal relocationUK to an EU choice hub post-Brexit. for those firms who may de where we will be in two years from now, it does Accepting that real negotiations can only be- seemWhile likely it is that extremely the outcome difficult of to the predict negotiations exactly gin once the UK election is over, it seems likely will be a UK outside the EU Single Market and Cus- that those negotiations are going to be tough, hard - paper on the assumption of a “hard” Brexit. peting interests both within the UK and within the toms Union. For this reason, we have based this EUfought 27. andIn addition, also complicated hard positions by conflicting adopted publiclyor com EQUIVALENCE - EQUIVOCAL AT BEST - Certain commentators have suggested that, with promise on down the line. nowThe may UK be Prime difficult Minister to back has down already from orindicated to com - that the UK intends to exit the single market and to tinuethe loss under of passporting,“equivalence”; access a system for UKwhereby financial the negotiate an extensive free trade agreement with EUservices grants firms access to the to theEU marketSingle Marketcould readily to non-EU con the EU. Such an approach seems to rule out Europe- an Economic Area (“EEA”) membership; that will have legislation deemed equivalent to that in force in(or the “third EU. country”) financial services firms that and credit institutions will lose the ability to pass- However, this would seem a less than ideal meanport their that services UK regulated into EU financial Member servicesStates without firms proposition, as it is for the EU to decide whether the need either for local branch or local subsidiary equivalence has been met by any third country, in- authorisation. cluding the UK. Even if some bespoke alternative to the current equivalence regime were put in place

targetThis EU position customers, will present as well aas major for those difficulty non-EU for that the EU would retain a veto on approval, which entitiesthose UK that financial passport services into Europe providers using that an actively autho- leadsspecifically to uncertainty to accommodate as to timing the and UK, potentially it is likely as rised UK subsidiary. To put the scale of the issue to outcome. To facilitate equivalence, the EU would most

in context, according to figures from the Financial

2 Dillon Eustace likely require that the UK retain equivalent legisla- location for international banks, some of whom tion to that already in place and also to replicate future EU legislation in the relevant area. These expand their Irish operations in light of Brexit. requirements may not be particularly palatable to Interestingly,have already the announced Bruegel plansInstitute, to significantlya the UK. The International Regulatory Strategy Group has carried out a detailed analysis2 of the EU’s ex- shiftbased to think Ireland tank, as aestimates result of Brexitthat almost4. a fifth of isting third country equivalence regime to ascer- wholesaleOn the capital finance markets activity side, within the the likely EU result could tain if it provides a possible solution to allow the of Brexit is that the ability for the UK to passport prospectuses throughout the EU will be lost. access to EU-markets following Brexit. Their re- This means that any prospectus issued by a portUK-based found financial that equivalence services industrymeasures cross-border are not suf- UK issuer would require approval from each - individual EU Member State in which it is proposed

currentlyficiently robust able to and avail that, of inthe any passporting event, only regime a lim debt offerings, which – if not listed – generally canited seeknumber to ofutilise financial equivalence services provisions,sectors that with are securities will be offered or listed. For wholesale several areas currently covered by passporting Directive5 , this may not be all that notable, but it having no equivalence regime at all. These include benefit from an exemption under the Prospective banking (deposit taking), lending, payment ser- The Irish Stock Exchange (the “ISE”) is one of vices, mortgage lending, insurance mediation and couldthe leading have a exchanges significant in impact the world on retail for listingofferings. by distribution; and activities relating to the manage- special purpose vehicles (“SPVs”), providing a ment of UCITS. sophisticated listing service for debt securities. Given the unpredictability and limited avail- - es providers cannot simply hope for the best. ability of equivalence regimes, UK financial servic THE EXPIRED PASSPORT The impact of a loss of The impact of a loss of passporting rights will be passporting rights will be felt activities. felt across a wide spectrum of financial services across a wide spectrum of Banking, Debt Capital Markets and Securitisation: financial services activity. the thousands of third country banks who use the City of LondonFor asUK their regulated EU hub, banks, a hard including Brexit may mean that they will no longer be able to offer regulated services on a cross border basis into an EU Member State in the absence of becoming We anticipate more issuers seeking to migrate authorised in such Member State. The passporting from the Stock Exchange to the ISE in regime contained in the Capital Requirements circumstances where they have up to now listed Directive3 allows deposit taking institutions to in London for the purposes of availing of EU wide carry out services such as lending and deposit passporting. taking throughout the EU on the basis of their Brexit also creates issues for the UK in the area home state authorisation. It appears likely that this of securitisation, particularly in the context of the will be lost by the UK post-Brexit, which we have proposed new Capital Markets Union (“CMU”)6. already seen is leading to many UK institutions One of the key tenets of the CMU is the concept of moving some operations to an EU Member State simple standard and transparent securitisation to ensure that they can continue to access the EU (“STS”). There is much uncertainty post-Brexit as to whether a UK securitisation would be able to

markets efficiently. Ireland is a well-established

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satisfy the proposed STS criteria, in circumstances geographical proximity to the UK, its existing

investor, sponsor, originator or original lender workforce and favourable corporate tax rate. (andwhere consequently a UK firm woulda risk-retainer) not be eligible in an STS to beif it an is Manyregulatory international framework, insurers, infrastructure, such as Allianz, qualified AXA, not regulated in the EU. Standard Life and , are already located here. Ireland is the leading European jurisdiction for Asset management - UCITS, AIFMD and the establishment and servicing of securitisation MiFID: The impact of the loss of passporting structures. As of March 2016, some 1,400 SPVs on the area of asset management may also be were established in Ireland, representing almost area. The main regulatory regimes affecting this assets) of the European industry. Securitisation significant, given the scale of regulation in this ina quarterIreland is (24% predominantly of financial international, vehicle corporation with 86 of passporting are the Undertakings for Collective per cent of Irish SPVs set up on behalf of non-Irish Investmentindustry, each in ofTransferable which currently Securities has the Directive benefit sponsors7. (“UCITS”9 Managers Directive (“AIFMD”10) and the Markets ), the Alternative Investment Fund MiFID II”11). The exact impact for participants in this area Ireland already has a ofin the Financial loss of Instrumentspassporting in Directive any particular II (“ case depends on a number of factors, such as where significant cross-border the fund or the client is located, the location of the asset manager and the types of investor. At one industry in the areas of level, the impact may not be too great. The fact banking, (re)/insurance, the UCITS passport to distribute throughout the EU,that forUK example,domiciled is UCITS of little will relevance cease to benefitas most from UK payment services, e-money, managers have domiciled their UCITS in Ireland or Luxembourg (if targeting more than the UK). AIFs, UCITS and asset Of more relevance is the fact that a UK ManCo will not be able to act as management company management/investment to a UCITS and it is not entirely clear that the current capacity of an EU domiciled UCITS ManCo services. to delegate asset management functions to a post- Brexit UK asset manager will remain as it is. The working assumption – which we shared – was that a UK asset manager would be no worse off than, for Insurance: The UK insurance sector also example, a US or Japanese asset manager. Rumours 8, – and they may prove to be no more than that – approximately £4 billion of UK insurance and indicate that we should not automatically make facesreinsurance difficulties. sector Accordingrevenues, or to 10% a LSEof the Study total, that assumption. are from EU-related business. However, because The position may be less problematic on the 75% of insurance and reinsurance services are provided through subsidiaries, about a quarter of these revenues, or £1 billion, may be lost to limitedAIFM side, and at the least obligations in the short and term, requirements as non-EU EU competitors due to Brexit. According to the thatAIFMs they are are possible. subject to However, will only increase. their rights That are is Intelligent Insurer, Ireland is a very attractive on top of competitive pressures in circumstances location for insurers seeking to create a unit within the EU to retain access to the common will have the greatest EU market access for the market post-Brexit, owing to its cultural and foreseeablewhere EU domiciled future. AIFs with EU domiciled AIFMs

4 Dillon Eustace ANDREW BATES KATE CURNEEN PARTNER, HEAD OF THE PARTNER, BANKING AND FINANCIAL SERVICES GROUP CAPITAL MARKETS GROUP

The impact of Brexit on the ability to passport providing services on foot of a passport. Given that the implementation date for Payment Services Directive II12 will be upon us in January 2018, MiFID services does not, at first glance, seem coupled with the relatively short period that toas eligible profound, counterparties as MiFID and does certain enable professional non-EU the UK has before Brexit happens, UK payment clientsinvestment based firms in the to EU. provide However, investment in order services to do institutions now need to examine alternative the European Securities and Markets Authority activity. so, such firms will be required to register with models for EU cross-border financial services (“ESMA”) and the UK will need to apply conduct of Ireland is a popular location for many business and prudential requirements equivalent to those applicable in the EU. Where UK investment 2016payment attracted services quite and a e-money bit of publicity, firms. Facebook’sas did the likely, in the absence of some negotiated bespoke establishment of an e-money firm in in late equivalencefirms seek to regime, offer services that EU toMember retail clients,States itwill is Services (one of the largest Mastercard issuers in Europe)more recent that they announcement plan to re-locate by Prepaid their operations Financial establish a branch in the relevant jurisdiction, from London to Ireland, a move that is estimated to priorrequire to the that provision such firms of such obtain services. authorisation and create up to 800 jobs. Ireland offers a real opportunity to address EMIR: European Market Infrastructure these challenges. UK asset managers can set up Regulation (“EMIR”)13 related activity will too be affected by Brexit – the likelihood is that UK central The opportunity also exists for the establishment counterparties will need to demonstrate to ESMA oftheir a so-calledown UCITS “Super ManCo ManCo” or a MiFID – dual firm UCITS in Ireland. and that the regime in the UK is equivalent to that in the EU. Experience has shown that this has proven 6(4) individual portfolio management capacity – in Ireland.AIFMD authorised, with the added AIFMD Article other third country jurisdictions, such as the USA. Payment Services and E-Money: Post- difficult in the past for credit counterparties in Brexit, it is also likely that payment services and BREXIT AND THE ECONOMIC, electronic money providers will need to become GEOGRAPHIC AND POLITICAL regulated in an EU country in order to continue ADVANTAGES OF IRELAND

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- Consolidation Act 1997 (as amended) provides - for particular tax treatment for qualifying SPVs portingIt is clear will that be required many UK to financial seek an alternative and credit EEA ser who satisfy certain criteria; it is widely used in basevices forfirms their that operations wish to continueas a result to of avail Brexit. of pass This is where Ireland presents a solution. Section 110 provides that the calculation of the securitisation and structured finance transactions. A Reputation for Excellence in Financial Services: Ireland is an obvious choice for many andprofits that, of subject a qualifying to compliance company with for relevant tax purposes anti- avoidanceeffectively legislation,mirror its commercial a deduction accounting is available profit for industryfirms seeking in the out areas an of alternative banking, (re)/insurance, EU base post- Brexit. It already has a significant cross-border taken together, typically result in the tax neutrality management/investment services. Indeed, many ofprofit these dependent vehicles. interest. These provisions, when payment services, e-money, AIFs, UCITS and asset A Vision for Success: Ireland is committed to business from London to an alternate EU hub may alreadyof the firms have now a presence looking in to Ireland. relocate parts of their strategythe growth in this of its area, financial with the services aim of industry. increasing In it is supported by a multitude of experienced employment2015 the Irish by Government 30%. In addition, launched the latest its five six year Our financial services sector is well-established; Dublin development plan has just been completed

standard.and well-resourced Ireland has professionala highly educated services (over firms 50% Brexit related business to the capital. This will ofoffering Irish 30 cost to 34 efficient year olds services have a third of an level exceptional degree; seeand thousands it provides more for thehouses likelihood and apartments of an influx being of the highest rate in the EU), skilled workforce, with built to accommodate an increased workforce. a wealth of experience to draw on in the area of Similarly, development is well underway to ensure

A Good Cultural Fit with Close Ties to the UK: to cater for this anticipated growth. According to Irelandfinancial has services. very similar legislative, cultural and that adequate commercial office space is available economic landscapes to the UK and ties between totaling over 12 million square feet are being the two jurisdictions are close. Savills, approximately 136 new office buildings, A Favourable Regulatory Environment: The to facilitate 100,000 new employees. planned for Dublin over the next five years - enough Central Bank of Ireland (the “CBI”), the country’s “engaged, efficient and open”14. TIME TO GET MOVING It is well embedded in the EU’s regulatory regime, Brexit will fundamentally alter the UK’s relation- withfinancial vast regulator, experience is in dealing with international ship with the EU and will have a profound effect institutions setting up in Ireland and its overall approach to authorisation is comparable to that in the UK. The CBI is committed to ensure that it on the landscape of financial services in Europe. has the resources to accommodate the anticipated relianceThe anticipated on the equivalence loss of the UK’sregime financial has capacity services to passport and the significant limitations inherent in and has announced that it is increasing its sector. Ireland offers available and effective solu- headcountBrexit-related substantially influx of authorisation to deal with this. applications tions.cause serious issues for the UK financial services Bottom Line: Ireland is an onshore EU jurisdiction and has a sophisticated taxation ABOUT DILLON EUSTACE regime, with a corporation tax rate of 12.5% for Dillon Eustace is a market leader in Ireland in the most trading income. It has an extensive double taxation treaty network (including a double tax established a dedicated, cross-sectoral Brexit ad- visoryareas ofteam banking to provide and financial our domestic services. and Weinterna have- reduce or eliminate the application of withholding tional clients with strategic advice on the legal, tax taxtreaty on withnon-Irish the UK) source which income. operates to significantly and regulatory implications of Brexit. In addition, Section 110 of Ireland’s Taxes Please do not hesitate to contact us if we can be

6 Dillon Eustace of any assistance to your business or if you have ABOUT THE AUTHORS any Brexit related queries. Andrew Bates - cial Services group at Dillon Eustace. NOTES is a partner and Head of the Finan 1 https://www.parliament.uk/business/committees/ committees-a-z/commons-select/treasury-committee/news- He advises a varied financial services client - base, including: regulated firms – mainly fund dence-16-17/ managers and sponsors (UCITS/AIFMD); asset parliament-2015/financial-conduct-authority-correspon – domestic and cross border; and service provid- 2 The International Regulatory Strategy Group “The EU’s Third managers and investment firms (MiFID); insurers Country Regimes and Alternatives to Passporting” – January other regulated sectors. He sits on the boards of ers, payment services firms and intermediaries in 2017 several investment fund platforms, Super Mancos 3 Directive 2013/36/EU 4 André Sapir, Dirk Schoenmaker and Nicolas Véron “Making Andrew is the author of several publications, - and MiFID firms. ary, 2017 the best of Brexit for the EU27 financial system” – 8th Febru 5 Directive 2003/71/EC including detailed guides on UCITS, AIFMD, 6 https://ec.europa.eu/info/business-economy-euro/growth- QIAIFs, MiFID and on insurance regulation. He is a former council member of the Irish Funds Industry and-investment/capital-markets-union_en services topics at domestic and international Association and is a regular speaker on financial 7 The Irish Debt Securities Association “Special Purpose conferences and industry events. He has been Vehicles and the Securitisation Industry in Ireland – Q&A” - recognised as a leading lawyer in these practice December 2016 areas by Chambers and Partners, The Legal 500, 8 - IFLR and others. ary 2017 Simeon Djankov “The City of London after Brexit” – Febru http://www.lse.ac.uk/fmg/dp/discussionPapers/fmgdps/ Kate Curneen is a partner in the Banking and DP762.pdf Capital Markets group at Dillon Eustace. 9 Directive 2009/65/EC - 10 Directive 2011/61/EU nance work, with a particular focus on structured 11 Directive 2014/65/EU Her practice covers a wide range of debt fi 12 Directive 2015/2366/EU capital markets and aircraft leasing. finance, corporate and asset-based lending, debt 13 Regulation (EU) No 648/2012 of the European Parliament She advises clients on regulatory matters, and of the Council of 4 July 2012 on OTC derivatives, central including: consumer and SME lending; counterparties and trade repositories authorisation and compliance issues; passporting; 14 Gerry Cross, CBI Director of Policy and Risk – speech dated credit servicing; and arrears resolution. Kate was also involved in formulating the Irish Services in Ireland” 23rd January, 2017 “Brexit and Asia: Implications for Financial Debt Securities Association’s response to the introduction of credit servicing legislation in DUBLIN OFFICE Ireland in 2015. Dillon Eustace Kate has spoken at industry events and is regu- 33 Sir John Rogerson’s Quay larly published and quoted in media publications Dublin 2 and local and international industry journals, in- Ireland Tel: +353 1 6670022 cluding The Financial Times, Finance Dublin, The consumerAirfinance lending, Journal, enforcementAlternative Credit of security, Intelligence credit OTHER OFFICES and HFM Week, covering topics such as: SME and • Cayman Islands leasing and Brexit. • Tokyo servicing, capital markets, aircraft finance and • New York www.dilloneustace.com

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