The impact of Brexit on the capital market
Published: 31. January 2020.
Following the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union (EU), which was ratified by the European Parliament on 29 January 2020, as of 1 February 2020 the United Kingdom is no longer a Member State of the EU.
What will change and what will remain the same regarding financial services?
According to press releases from the European Commission (EC), published on 24 January 2020, and the European Securities and Markets Supervisory Authority (ESMA), published on 31 January 2020, the Withdrawal Agreement foresees a transitional period from 1 February to 31 December 2020.
During the transitional period, the EU law (MiFID II / MiFIR, EMIR, CSDR, AIFMD) will continue to apply to the rights and obligations of UK-based entities, and they have an obligation to adjust their business to the fact that from 1 January 2021 they will have the status of a third country company with respect to the EU Member States.
In practice, this means that the UK companies notified by 31 January 2020 for cross-border provision of services in the Republic of Croatia can freely provide services on the basis of an EU passport during the transitional period.
However, since the UK lost its EU Member State status, as of 1 February 2020, Hanfa will no longer receive new notifications from the FCA (Financial Conduct Authority) and the PRA (Prudential Regulation Authority) for cross-border provision of services. The UK companies that wish to provide services in the Republic of Croatia for the first time will have to meet the requirements laid down for each type of financial service for third country companies.
Given the fact that the ratification of the Withdrawal Agreement in the European Parliament is the basis for the start of EU and UK negotiations on the terms of the withdrawal, Hanfa will monitor and regularly update information on arrangements reached in the area of provision of financial services, in order to keep the market and users informed of the potential impact of the agreements reached on their rights and interests.
For the purpose of protecting financial services users and safeguarding the stability of the financial system, the Croatian Financial Services Supervisory Agency (Hanfa) would like to draw the attention of supervised entities and the public concerned to the consequences that the withdrawal of the United Kingdom (UK) from the European Union (EU) may have on the Croatian capital market. Due to the postponement, the potential exit dates are 31 October 2019 (for a no-deal Brexit) or 22 May 2019.
Taking account of Hanfa’s attention paid to protecting consumers, ensuring the smooth functioning of financial markets and safeguarding the financial stability, and following the analysis of data obtained from supervised entities, no systemic risks are expected to materialise on the Croatian capital market, due to the low level of exposure of its entities to the British market. However, irrespective of the low level of risk, all market participants are invited to follow the latest news and updates on Brexit and its consequences and adjust their business operations to the latest developments. In particular, this relates to situations that may arise in the case of the withdrawal of the United Kingdom from the European Union without a withdrawal agreement (the so-called no-deal Brexit), which would be followed by a transition period.
As a direct consequence of Brexit, regulated entities from the United Kingdom will no longer be able to provide services and perform activities directly in other EU Member States (the so-called passporting). Therefore, they will have to apply, in a timely manner, for a third-country service provider licence (which depends on regulatory regimes of Member States) or move their headquarters to another Member State and obtain a new licence. In this respect, the European Securities and Markets Authority (ESMA) has issued the following public statement: Timely submission of requests for authorisation in the context of the United Kingdom withdrawing from the European Union.
In addition, Croatian entities passporting services in the United Kingdom will no longer be able to do so after Brexit, but will have to depend on the new British regulatory regime. The United Kingdom has established a temporary permission regime allowing EU firms using a passport to continue providing their services.
Therefore, Croatian entities, both Hanfa’s supervised entities and other users of financial services provided by UK firms, need to check with these firms if and how they have ensured preconditions for further cooperation even in the event of a no-deal Brexit. It is also advisable to arrange for alternative possibilities for conducting transactions and using services, such as the conclusion of contracts on the provision of similar services with firms in other EU Member States.
Apart from these direct consequences, Brexit may also exert an indirect impact, as various events on foreign markets could have an effect on parent companies of domestic financial institutions, as well as on the entire Croatian economy, considering the risks related to the contraction of large EU economies that have intense economic relationships with Croatia.
Hanfa's international activities
As a member of the European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), and through cooperation with the Ministry of Finance in the Council of the European Union, European Commission working groups and the Ministry of Foreign and European Affairs, Hanfa participated in the preparation of measures needed to address Brexit-related issues.
By participating in the work of ESMA, Hanfa took part in the preparation of the Multilateral Memorandum of Understanding, to be concluded between representatives of EU-27 (and EEA) supervisory authorities and the UK’s Financial Conduct Authority (FCA) in the no-deal Brexit scenario. Read more on ESMA’s public statement: ESMA and EU securities regulators agree no-deal Brexit MoUs with FCA. At the moment, similar memoranda are being agreed on at EIOPA.
Hanfa expects ESMA and EIOPA to provide for more detailed instructions for market participants soon, which will be published regularly on Hanfa’s website, as well. We would also like to draw attention to public statements issued by the European Commission, providing general information on the preparations for Brexit in all EU official languages: Preparedness notices regarding financial services and capital markets union.
In the event of the United Kingdom (UK) withdrawing from the European Union (EU) without a withdrawal agreement, investment firms from UK will no longer be permitted to offer investment services directly to retail and professional investors in the Republic of Croatia. Should they wish to continue providing their services, they will either have to establish a branch office (subject to Hanfa’s authorisation pursuant to the Capital Market Act) or depend on the sole initiative of the client. This means that the advertising and offering of services in the Republic of Croatia at the initiative of the firm are, in principle, prohibited. Branches of UK investment firms in the Republic of Croatia will either have to stop operating or obtain Hanfa’s authorisation to operate as a third-country branch and thus become a regulated entity in the Republic of Croatia.
In order to be able to provide services directly to institutional investors in the Republic of Croatia, UK investment firms will have to register in the third-country investment firm register, kept by the European Securities and Markets Authority (ESMA). This is why institutional investors in the Republic of Croatia need to update the arrangements they have with UK firms.
As regards Croatian entities that provide investment services and intend to provide them in the UK, the Financial Conduct Authority (the British competent authority) has published information related to the Temporary Permissions Regime, available via the following links: Temporary Permission Regime - general information and Temporary Permission Regime - detailed information, until 28 March 2019.
REPORTING AND PROVISION OF INFORMATION
A no-deal Brexit would also have a significant impact on reporting and databases managed by ESMA, primarily those related to MiFID2/MiFIR, FIRDS, TREM, DVC and SI calculations, with respect to which recalculations should have to be made within a certain period of time following Brexit. More information is available via the following links: Use of UK data in ESMA databases and performance of MiFID II calculations in case of a no-deal Brexit and Public statement in relation to the application of MiFID II/MiFIR and BMR provisions in case of a no-deal Brexit.
After having analysed regulations of the UK as a third country, Croatian depositaries and custodians who provide depositary and custodianship services to their clients (e.g. investment and pension funds) and have delegated custodianship services to third parties established in the UK should present the risks to their clients and implement appropriate safeguards, especially regarding the treatment of financial instruments in the event of third party insolvency.
Croatian investment firms and UK firms that have carried out the notification procedure needed to provide services in the Republic of Croatia are obliged to provide their clients with full, accurate and timely disclosure of the impact of a no-deal Brexit, as described in ESMA’s public statement: Reminder to firms on their MiFID obligations on disclosure of information to clients in the context of the UK withdrawing from the EU
As regards investment funds and investment fund management companies, the withdrawal of the United Kingdom (UK) from the European Union (EU) without reaching a withdrawal agreement (a no-deal Brexit) will mean that their notification will no longer be valid and all funds (UCITS, AIF, EuVECA, EuSEF, ELTIF, IMF) from the UK will become non-EU AIFs and will be able to, potentially, be offered to investors in the Republic of Croatia (RH) through the so-called national private placement regime (NPPR). However, the Alternative Investment Funds Act did not implement Articles 36 and 42 of Directive 2011/61/EU on Alternative Investment Fund Managers (AIFMD), which regulate the national private placement regime and which enable Member States to allow authorised EU AIFMs to market the units of AIFs from the third country they manage without a passport in their territory, i.e. to allow AIFMs from third countries to market units of funds they manage without a passport in their territory.
Therefore, it will not be possible to market units of AIFs from third countries (UK) in the territory of the Republic of Croatia, as well as units of AIFs managed by UAIFs from third countries (UK) without a passport. In addition, UCITS funds offered via passport by the date of the withdrawal without an agreement will be considered non-EU AIFs in the event of a no-deal Brexit and their distribution will no longer be allowed.
Croatian AIFMs wishing to manage UK funds after Brexit should consult the data on entering the temporary permissions regime published by the Financial Conduct Authority (the British national competent authority) on 28 March 2019. (Temporary Permissions Regime): Temporary Permissions Regime.
Croatian investment and pension funds, as well as all other institutional investors investing in British financial instruments, which will become investments in a third country after the UK withdraws from the EU, must take into account the new legal framework applicable to their investments. Management companies should also prepare investor information models regarding the possible consequences of the occurrence of the aforementioned scenario in relation to investment strategies of certain funds.
Croatian depositaries and custodians who provide depositary and custodianship services to their clients (e.g. investment and pension funds) and have delegated custodianship services to third parties established in the UK, after analysing regulations of the UK as a third country, should present the risks to their clients and implement appropriate safeguards, especially regarding the treatment of financial instruments in the event of third party insolvency.
In the event of the withdrawal of the United Kingdom (UK) from the European Union (EU) without reaching a withdrawal agreement (a no-deal Brexit), insurers from the UK will lose their authorisation to conduct insurance activities / reinsurance activities / insurance distribution in the EU Member States from the date of the no-deal Brexit. Therefore, in the Republic of Croatia, the provisions of the Insurance Act referring to insurers from third countries will apply to insurers from the UK from the date of a no-deal Brexit.
This means that British insurance/reinsurance companies will be able to provide their services in the territory of the Republic of Croatia exclusively through a branch or under the right of establishment (Article 78 and Article 83(1) of the Insurance Act). Exceptionally, reinsurance companies from the UK will be able to conduct reinsurance business in the territory of Croatia under the freedom to provide services if the solvency regime of the UK as a third country is established by the European Commission in accordance with Regulation (EU) No 2015/35 and other European Commission regulations governing the equivalence of third-country reinsurance undertakings, equivalent to the solvency regime as defined by the Insurance Act (Article 83(3)). More information in the opinion of the European Insurance and Occupational Pensions Authority (EIOPA): Opinion on the solvency position of insurance and reinsurance undertakings in light of the withdrawal of the United Kingdom from the European Union.
UK-based insurance distributors will no longer be authorised to provide insurance distribution services in Croatia upon the UK leaving the EU, since the Insurance Act does not offer such a possibility to third-country distributors.
Croatian insurance companies authorised to directly provide insurance services in the UK and insurance/reinsurance companies from the UK authorised to directly provide insurance services in the territory of the Republic of Croatia are obliged to inform their clients in a timely, accurate and comprehensive manner of the changes caused by the UK withdrawal from the EU, especially in the case of a no-deal Brexit.
It is important to note that insurance policyholders / insured persons / beneficiaries under insurance/reinsurance contracts concluded with insurance companies from the UK could face potential risks in relation to the fulfilment of claims under existing insurance/reinsurance contracts, should these companies lose authorisation to conduct business in the EU area (except for those who set up a branch in Croatia upon the withdrawal from the EU). We are therefore advising persons who have concluded contracts with insurance companies from the UK to contact these companies and their supervisory authority (the Bank of England) regarding the necessary steps to ensure the continuity of services and fulfilment of obligations of insurers under these insurance contracts.
In this regard, we are drawing attention to EIOPA’s opinions: Opinion on disclosure of information to customers about the impact of the withdrawal of the United Kingdom from the European Union and Opinion on service continuity in insurance in light of the withdrawal of the United Kingdom from the European Union.
With respect to central counterparties (CCPs) from the United Kingdom (UK), in the event of a no-deal Brexit, they would all become unqualified and unrecognised third-country CCPs and their license under the EMIR Regulation would no longer be valid. However, in order to avoid distortions in the EU financial markets, on 19 December 2018, the European Commission, made provisional decisions recognizing the equivalence of UK legislation in connection with CCPs for the period of 12 months after Brexit, and at the same time, the European Securities and Markets Authority (ESMA) started the process of recognizing British CCPs (ESMA is ready to review UK CCPs’ and CSDs’ recognition applications for a no-deal Brexit scenario) and issued a decision on recognizing them (ESMA to recognise three UK CCPs in the event of a no-deal Brexit).
The European Commission and ESMA issued equivalent decision in relation with British central securities depositories (CSD) for the period of 24 months after Brexit (ESMA to recognise the UK Central Securities Depository in the event of a no-deal Brexit).
In this regard, in the event of a no-deal Brexit, there should be no immediate disruption on the derivatives market. However, entities from the Republic of Croatia that indirectly use services of British CCPs should prepare alternative arrangements after the expiration of the transitional period.
As regards EU CSDs and CCPs that provide or intend to provide services in the UK, the Bank of England - the competent British authority for CSDs and CCPs - has issued statements in connection with the use of the UK Temporary Permissions Regime: Information on the effect of the UK’s withdrawal from the EU on FMI supervision.
According to the information currently available, Croatian participants, within the meaning of the Settlement Finality Directive (SFD), do not participate in the UK settlement systems. Nonetheless, the Croatian settlement system may enter the UK temporary regime if necessary to ensure business continuity. This means that a central securities depository (CSD) with its registered office in the Republic of Croatia, as a settlement system, should be notified with the Bank of England if:
- there are participants in the Croatian settlement system with their registered office in the UK,
- there are indirect participants in the Croatian settlement system with their registered office in the UK.
Furthermore, ESMA has issued statements on the manners of reporting under the EMIR Regulation in the event of a no-deal Brexit, which envisage various scenarios of reporting on OTC derivatives transactions. The statements are available via following links: On issues affecting reporting, recordkeeping, reconciliation, data access, portability and aggregation of derivatives under Article 9 EMIR in the case of UK withdrawal from the EU without a transitional agreement and ESMA proposes a regulatory change to support the Brexit preparations of counterparties to uncleared OTC derivatives.
Croatian entities that use services of the UK approved publication arrangement (APA) to publish data on OTC transactions under an obligation from the MiFIR Regulation will no longer be able to use the services of such entities, unless they are relocated to one of the EU27 Member States.
In addition, in the case of a no-deal Brexit, the UK trade repositories (TRs) will lose their existing license and become third-country TRs which must apply to ESMA for the recognition process. Only after completion of this process, it will be possible to fulfil the reporting obligations under EMIR and SFTR through them.
Credit rating agencies (CRAs) from the UK will lose their passport, and their credit quality assessments will no longer be able to be used, unless a British credit agency is part of an EU credit rating agency group and its rating is confirmed by that EU CRA. Therefore, prospectuses of issuers containing a credit rating issued by a British credit rating agency must indicate that such rating was not issued by a regulated EU credit rating agency.
With regard to such entities, ESMA has issued the following statement: Contingency plans of Credit Rating Agencies and Trade Repositories in the context of the United Kingdom withdrawing from the European Union, and some UK entities have already relocated to other EU27 Member States (example).
For Croatian entities that provide these services and intend to provide them in the UK, the Financial Conduct Authority (the British competent authority) has published information related to the Temporary Permissions Regime, available via the following link: Temporary Permissions Regime.
Statements and opinions of European Supervisory Authorities
European Securities and Markets Authority (ESMA) and European Insurance and Occupational Pensions Authority (EIOPA), as well as other relevant competent authorities have issued opinions in relation to the preparation of financial institutions to the withdrawal of United Kingdom from the European Union. Hanfa refers its supervised entities and users of their services to consult these opinions and statements:
Bank of England & Financial Conduct Authority (FCA)