The Association for Financial Markets in Europe said the capital markets industry may relocate some activities if the U.K. votes to leave the European Union, in a referendum on June 23.
The association published a report last week that assesses the consequences of a “Brexit” for British and European banks and EU companies and investors who rely on access to the U.K. investment banking industry.
The report, “The UK Referendum: Challenges for Europe’s Capital Markets,” investigates alternative treaty frameworks for a U.K.-EU relationship in capital market services and the extent to which existing “third country” regimes in EU legislation might mitigate the impact of the U.K. leaving the EU on cross-border business.
However, Chris Bates, partner at Clifford Chance, the law firm that wrote the report, said it was likely there would be a prolonged period of uncertainty about the availability of passport regimes which allow banks and investment firms to market their products and services across the European Union under existing legislation.
The passport regime allows firms to provide services to clients and counterparties across the EU from a single location and to participate remotely in trading, clearing and settlement infrastructure in other member states.
The passports have thereby enabled EU firms to centralize their provision of capital markets services in a single hub location in the EU, notably in London, and to cut their numbers of local subsidiaries.
The AFME report notes that global banks based in the U.K. would no longer have the right to passport their services to the rest of the EU without the need for local authorization in each member country. Unless the U.K. remained in the European Economic Area, any replacement trade agreement would therefore have the potential to restrict cross-border trading.
The capital markets industry would also face a time-consuming and complex process, and real operational challenges not only for U.K. banks wishing to trade in the EU, but also for the many EU companies and investors who rely on continued access to the U.K. investment banking industry and financial services.
U.K. banks and investment firms that use the U.K. as a hub location to provide cross-border investment banking, corporate banking and private wealth management services to clients and counterparties in the EU are likely to be significantly and adversely affected by new restrictions on cross-border business following a U.K. exit from the EU, the report said.
The U.K.’s asset management industry has about a 50 percent market share in Europe, which relies on its ability to distribute its products and services in Europe under the UCITS and Alternative Investment Fund Managers Directives.
While the “third country entity passport” under the Markets in Financial Instruments Regulation (MiFIR), if activated, “could be an important mitigant allowing wholesale cross-border investment services to be provided in the EU,” MiFIR would not assist in relation to other cross-border services, in particular deposit-taking, lending and credit and foreign exchange or private wealth management.
“It may be necessary to relocate some activities to branches or entities based in the EU in order to continue to access clients and counterparties there,” the report concluded. Trading venues, central counterparties and central securities depositories and their users could also be affected by new restrictions unless these infrastructures are recognized as equivalent in the EU and the U.K. “The resulting change to the insolvency law treatment of clearing and payment systems and banks and investment firms may cause firms or their counterparties to re-evaluate their relationships,” the study said.
Even if it is possible to mitigate much of the immediate impact of any U.K. exit, changes to law or regulation over time in the U.K. and the EU could adversely affect the existing harmonized legal framework.
For instance, courts in the EU would no longer be required to recognize the judgments of U.K. courts, or vice versa, and the process of recognition would be less straightforward.
The U.K. and the EU could enter into a new convention on jurisdiction or the recognition of judgments in civil and commercial matters to address this gap, the report suggested. “Alternatively or additionally, the U.K. might accede to the 2005 Hague Convention on Choice of Court Agreements to which the EU is already a party. This would ensure that the courts in the U.K. and the EU would recognize contractual agreements conferring exclusive jurisdiction on the chosen courts, but would not address the issues relating to non-exclusive jurisdiction clauses common in financial agreements.”