What's behind the Brexit White Paper?

The two immediate cabinet resignations of Boris Johnson and David Davis, were followed by the Prime Minister accepting Brexiteer amendments to the Customs Bill on taxes, tariffs and VAT, which arguably could prevent aspects of the White Paper even being capable of negotiation.

As resignations poured in, including the pro-Remain minister for defence procurement, the Prime Minister then deflected a remainer rebellion to the Customs Bill, of combined pro-EU and Labour politicians, winning the vote by a whisker.

With the White Paper’s themes having a rocky rideat home, reception on the continent has been underwhelming.

The EU’s chief negotiator, Michel Barnier, praised the White Paper for opening “the way to constructive discussion” and providing many usable elements, but questioned whether proposals were compatible with earlier EU stated principles; took swipes at proposals for regulatory alignment on manufactured goods, and knocked proposed customs arrangements.

The US and Canada both hold TCR status. The White Paper proposes an arrangement worse than passporting, but better than TCR. Let’s call it TCR-plus.

He also noted that the UK services proposals could give the UK a “significant competitive advantage” which might not be in the EU’s “best interests”.

So with most of the potential Brexit outcomes still possible, and the White Paper affirming the “nothing is agreed until everything is agreed” negotiating principle, what are the White Paper principles relevant to the City? And what do they mean for UK financial services and the City? 

What are the proposals for UK-based financial institutions to access the EU?

Maintaining existing passporting rights was the City’s dream Brexit outcome.

Increasingly, it seemed unlikely, and the White Paper eliminates this hope, stating that: “the UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.” 

Passporting

Absent passporting, the consensus view was that Third Country Regime (TCR) access provisions were the most practicable alternative.

TCRs are established under EU rules covering third country established firms. 

Under existing EU law, TCRs provide rights of access below passporting for financial services, such as conducting certain regulated activities, providing wholesale investment or portfolio management services; or fund management services, without further authorisation requirements from an EU member state.

The US and Canada both hold TCR status. The White Paper proposes an arrangement worse than passporting, but better than TCR. Let’s call it TCR-plus.  

Noting that the UK’s dominant position – 30 global systemically important banks based in London, with four selecting the UK as home. 

The White Paper concludes that a TCR would not be workable for the UK’s financial markets due to deep UK/EU interconnectivity.

This would be compounded by a lack of institutional dialogue arrangements between regulators, the absence of systems to maintain compatible rules, and insufficient reciprocal supervision co-operation mechanisms. 

The TCR-plus starting point is that as at the end of the transition period (currently likely to run until the end of 2020), the UK and the EU will have identical rules and matching supervisory frameworks, that is, true equivalence in all currently passported areas.

The EU and UK must then have freedom to diverge in their approaches, but it will be in their joint interests to have common objectives for promoting financial stability and preventing regulatory arbitrage. 

Underpinning this, the White Paper proposes, will be regulatory dialogue, supervisory co-operation and a bilateral framework of treaty-based commitments, to align the different regimes. 

The approach is pragmatic and is an improvement on the other two commonly recognised solutions, which ranked below passporting and TCR: establishing an EU branch or subsidiary.

It should be realistic, but if Mr Barnier is concerned that the proposals give a “significant competitive advantage” to the UK, they may be too good. Politics and EU economic ambitions may make establishing an EU subsidiary or branch the only alternatives for UK-based financial institutions.

While establishing an EU subsidiary can take advantage of existing EU passporting rights, the advantage may be eroded by requirements to transfer all or some of the UK business to the EU subsidiary.

Currently, most financial firms are establishing subsidiaries in other EU states, but whether these become substantive subsidiaries will depend upon the agreed nature of the TCR-plus approach.

The other alternative, the rarely used “branch access”, is not currently available in all areas of financial services.  Depending on the number of jurisdictions where a firm does business, a requirement to establish multiple branches may also be necessary.

So the White Paper, while welcomed, is not changing the tack of UK financial institutions’ Brexit preparations.

However, hope remains that a TCR-plus route can be arranged, and even if an EU subsidiary is required, new arrangements could provoke minimum business disruption through capital and personnel realignments.

The White Paper states that the UK is to seek reciprocal arrangements allowing UK nationals to visit the EU without a visa for short-term business reasons. The UK also wants reciprocal provisions on intra-corporate transfers between UK and EU-based companies.

Clearing

The paper is light on detail, perhaps necessarily so.  However, with the EU pressuring a move of euro clearing post-Brexit to the eurozone, which could result in significant City job losses, clearing should have been addressed in the White Paper.

What impact does the White Paper have on law firms and accountants? Current EU rules provide that a judgment given in one member state is enforceable in all other member states, without taking further action. 

So without further agreement, as the UK will no longer be an EU member state, this reciprocal recognition will no longer directly apply to the UK. Arguably this could diminish the attractiveness of English law, impacting City law firms, largely staffed by English law qualified solicitors. 

The current draft of the UK’s withdrawal agreement provides that, post Brexit, the UK and EU courts will be bound to respect jurisdiction clauses in favour of the EU and UK courts (respectively).  

The White Paper goes further providing that “the UK is… keen to explore a new bilateral agreement with the EU, which would cover a coherent package of rules on jurisdiction, choice of jurisdiction, applicable law, and recognition and enforcement of judgments in civil, commercial, insolvency…matters”. 

For audit and accounting equivalence, the White Paper provides that the UK will seek EU equivalence and adequacy decisions under the EU’s third country regimes by the end of the transition period. 

For law and accountancy more generally, the White Paper proposes to permit the joint practice between UK and EU lawyers, and continued joint UK-EU ownership of accounting firms.

The White Paper proposes a much stronger and practicable position for the City than has generally been reported. Its proposals are under threat, though, both at home and abroad. 

The financial services sector should be pleased that the proposals are favourable, and it should soon become clear whether the proposals are viable.  In the meantime, while the rollercoaster continues, financial institutions must continue their preparations as best they can.

Ed Parker is a partner at Mayer Brown