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 portmean 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 theannounced Bruegel plansInstitute, to significantly a Brussels 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 capitalfinance marketsactivity side,within the the likely EU resultcould 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 London 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 Dillon Eustace 3 IRELAND: POST-BREXIT FINANCIAL SERVICES 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 Zurich, 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 theFinancial loss of Instrumentspassporting inDirective 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, orto 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 theleast obligations in the short and term, requirements as non-EU EU competitors due to Brexit.