Brexit update on financial services a panel discussion

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2 Brexit update on financial services a panel discussion 16 December 2016 Paul Edmondson Partner, CMS London Shanker Singham Director of Economic Policy and Prosperity Studies Andreas Feneis - Counsel, CMS Frankfurt Jerome Sutour - Partner, CMS Paris Vivian Walry - Partner, CMS Luxembourg Kaspar Landolt - Partner, CMS Switzerland

3 Agenda - Panel discussion Q and A format - Views and news from continental centres Frankfurt, Paris and Luxembourg - Lessons from the Swiss experience - Shanker Singham and the work of the Legatum Institute and its Special Trade Commission - Debate about the likely outcome for FS sector 3

4 Overview - Brexit outcomes Full English? - EEA or other full single market treaty for all sectors OR - Single market package for FS alone Croissant, coffee and perhaps some jam? - More limited mutual recognition / home supervision via regulatory cooperation / financial services zone Dry toast? - CETA / FTA style with UK equivalence status under current EU legislation OR - No deal and/or no equivalence in time for Brexit 4

5 Update from Germany Are German financial services firms and their trade bodies lobbying for one of these outcomes? Are they keen to keep some form of mutual passporting for their UK business? What will drive the German government s position on this are they concerned about cross-border business or is it more about taking business from the City of London? What is the situation on UK firms with existing branches in Germany or those looking to set up new German subsidiaries? 5

6 Update from France Questions as for Germany and additional issue - Labour law has traditionally been a big concern about moving to Paris. Any movement here for FS firms and does the rise of Fillon suggest change is on the way? 6

7 Update from Luxembourg - Questions as for Germany 7

8 The Swiss perspective Are their lessons for the UK to learn from the Swiss experience of bilateral arrangements with the EU? The Swiss/EU agreement/treaty of 1989 enables a Swiss non-life insurer to operate a branch in any EU state host state authorisation is required but mutual recognition of financial rules means dual regulation is much less onerous (and visa versa for EU insurers). Is their scope for mutual recognition of this kind in a Swiss/UK agreement? 8

9 Bilateral agreements Switzerland/EU 9

10 Insurance - Content Grants mutual and equal freedom of establishment to companies in the field of direct insurance for damage (household, motor vehicle, travel and liability insurance, etc.) - Relevance Crucial for internationally operating insurance companies. Important for the Swiss economy: in 2014, the Swiss insurance sector provided jobs for 47,832 people in Switzerland and 69,236 abroad - Entry into force:

11 Free movement of persons - Content Entitles Swiss and EU citizens under certain conditions to choose their workplace and residence freely within the territories of the Contracting Parties Leads to mutual, gradual and controlled opening up of labour markets through transitional arrangements Accompanying measures to protect employees (ensuring compliance with pay and working conditions in Switzerland) - Relevance Important growth effect: Swiss economy is dependent on foreign workers. Better opportunities for Swiss nationals in the EU - Entry into force:

12 Initiative stop mass immigration - Adoption on 9 February 2014 with 50.3% of the votes and the majority of the cantons - Core elements according to the new Art. 121a Cst 1. Switzerland autonomously regulates immigration. 2. a) Restriction of residence permits through annual quantitative limits and quotas 2. b) The right to permanent residence, family reunification and social benefits may be limited 3. a) Quantitative limits and quotas must be geared towards Switzerland's overall economic interests. 3. b) Businesses must give Swiss nationals priority when hiring staff 4. No treaties of international public law that infringe the article 5. Details to be defined at the legislative level 12

13 Best guess on key outcome With your particular insights on UK policy, can you kick off by giving us your best guess on: - Brexit date? - Date new EU/UK treaty/fta agreement takes effect? - EEA membership? - Customs union membership? - WTO rectification for the Brexit date? - Transitional and/or grandfathering for FS firms? 13

14 Timetable Brexit negotiations and implementation The UK and EU appear to have very different ideas about the negotiation process and what will be negotiated when. The latest statement from Barnier rejected (yet again) parallel negotiation of the withdrawal agreement and a new UK/EU relationship. - What sort of Brexit timetable do you envisage and why? 14

15 The Full English? This would be - EEA membership or another treaty basis for full single market participation (across all sectors) OR - A package of all single market legislation for FS alone (Full English means passporting and harmonised/single market FS regulation would remain) - Clearly there are political issues (immigration control/cherry picking etc.) but in the long term can you see the Treasury, PRA and FCA as rule takers? - So UK unlikely to seek this as the long-term solution? - The optimum result in terms of confidence for FS firms that they do not have to start transferring operations to Paris, Frankfurt etc. early in the new year would be an early announcement that UK was applying for (or continuing) its EEA membership on a transitional basis. Firms could then plan on the basis that the UK would remain in the single market for another 5 years what are the prospects? 15

16 Avoiding the cliff edge The transitional issue is critical for planning by financial services firms. The Full English for a transitional period? Would the best prospect be an FS specific deal with the UK accepting that it will continue to follow EU rules for a transitional period of (say) 3 years? But is there a real risk that we fall off the cliff, because the agreement on transitionals - Comes too late - the we cannot wait and see conundrum or - Fails completely - because of negotiation risk - will the EU see as cherry picking or unnecessary if the UK is not staying in the single market? or Legal/ratification risk? Do you think transitionals might fail if the CJEU takes a broad view of mixity in the Singapore case? How would such an agreement operate without umbrella of EU or EEA membership and how would EU implement? - Is delaying the Brexit implementation date (slow Brexit) an option? 16

17 Grandfathering What about grandfathering? So far the debate in UK has focused on free movement and EU nationals resident in UK (and vice versa) - UK appears ready to grandfather those resident in UK in exchange for equal treatment of UK nationals But what about grandfathering of firms by reference to passport notifications could they be given provisional authorisation in host state for a transitionary period? 17

18 Croissant, coffee and perhaps some jam UK FS firms would have: - less single market rights than EU/EEA firms (politically important) but - benefit of some mutual recognition to reduce barriers to cross-border activities from dual regulation ( DR barriers ) Key DR barriers: - Requirements for TCFs to establish subsidiary - Host state financial regulation of branch (see EU rules for insurers and Swiss agreement) - Protective perimeter rules and lack of services regime Without EEA or some similar single market package, the UK would be looking for a completely new third country model in FS not Swiss, Turkey, Canada, Norway or any other existing model? 18

19 Croissant, coffee and perhaps some jam A Regulatory Cooperation Framework with (as much) home state supervision (as possible) for cross border activities in UK/EEA financial services zone? Requires very detailed negotiation (not a mere forum for discussion) and impossible to predict what the result might be? Might result in very extensive mutual recognition or more limited reduction in DR barriers? What might that model look like - Supervisory cooperation and supervisory colleges? - Policy coordination? - Institutional structure required (as EEA institutions not available) Joint committees or authorities? 19

20 Croissant, coffee and perhaps some jam Regulation of UK/EU cross border business reduction in barriers from dual regulation (DR barriers) - Mutual recognition with substituted compliance and home state supervision? - A bilateral/two-way approach? There has been a lot of talk about the EU equivalence regime for third country firms but does that miss the point? - Start point is how the different modes of supply by TCFs are currently regulated in practice (i.e. worst case for the future) under domestic law (which reflects any EU harmonisation of TCF treatment) services, branch, or subsidiary? 20

21 Croissant, coffee and perhaps some jam The EU introduced single market measures to eliminate DR barriers in stages (e.g. in insurance) post-brexit some elements might apply between EU and UK but more radical elements would not: - Wholesale (less radical) versus retail (more radical)? - Services passport versus branch passport? - Country of origin for prudential versus conduct of business? 21

22 Croissant, coffee and perhaps some jam How would mutual recognition be maintained? - On the trade law side, there has been a growth in the use of objective criteria for market access and contestability in FTAs so firms can challenge national measures that they believe to be restrictive before a tribunal. In theory mutual recognition between the UK and EU could also operate on the basis of objective equivalence criteria - as rules change mutual recognition would depend on whether an objective equivalence test was satisfied. Would regulators accept objective equivalence criteria with an FTA style disputes mechanism? - EU FS legislation approach to equivalence the unilateral approach? - The Swiss / EU non-life insurance treaty the consensual approach? 22

23 Dry toast CETA / FTA style with UK equivalence status under current EU legislation Free Trade Agreements & WTO - Do you agree with the FCA and others who appear to have concluded that CETA, TTIP, TPP style free trade agreements cannot be expected to provide any material single market style reduction in dual regulation of crossborder business (NTBDRs)? - WTO schedules focus on achieving national treatment i.e. dual regulation without any reduction in NTBDR? - UK might be granted full set of equivalence status but limited benefit to UK firms? 23

24 The UK domestic regime post-brexit There has been a lot of discussion about the UK shedding current EU requirements the bonus cap, for example, and a select committee is looking at the Solvency 2 regime from this perspective - How far is this process likely to go? Do you think the UK might, as has been suggested, become a beacon of liberal regulation in financial services and offer lower/softer regulation to attract business. Do you think this is likely in the FS sector? There has also been discussion of the UK adopting a domestic FS regime with bifurcation or even an international or EU financial services zone i.e. - Domestic rules for domestic firms and International / EU rules for international firms. Do you think substantial two-tier regulation is viable? 24

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