Now Boarding for Brexit: What Businesses Need to Do

Whether you are a U.S. firm or a firm from some other country and want to do business in the United Kingdom, the Brexit referendum may have changed your mind. In this article, we discuss some of the issues currently faced by companies having to rethink their business plans.

The EU treaties and the sectoral directives made under them give EU insurers, reinsurers, banks, fund managers and other entities the right to provide services into every other country in the EU. They also give companies the right to open a branch in every other country in the EU, under so-called “passporting.”

Until June 23, 2016, the date of the U.K.’s Brexit referendum, these rights were taken for granted. There was no need to work out whether a firm was actually going to exercise its rights. The firm ticked the passporting boxes on the relevant forms, gave the regulators the barest of information about its pan-European plans, waited a few weeks and the passporting rights were secured.

It would be an exaggeration to say that, if you are doing business in the EU, you have talked about little else since June 24, 2016. But if you work for a regulated firm doing business in the UK, it is likely that in the last three years you have discussed the importance of passporting.

At first, there was speculation that the withdrawal agreement, and the future trading relationship, between the U.K. and the EU would allow passporting to continue in both directions. That hope was quickly replaced by an expectation that the EU would give the U.K. super-equivalence for regulations, and life would continue almost as before. Now, even ordinary equivalence looks ambitious to some.

So how are European firms managing the impending loss of these rights? There is no single answer. Some have established a new authorized subsidiary in another part of the EU, and they are gradually shifting their European business from the U.K. to the new subsidiary. Others had a small entity in one part of the EU and their main entity in the U.K., but that balance is gradually being reversed.

North American businesses that wanted to expand into the EU used to come to the U.K. first, before expanding across Europe. That is still happening to a degree. However, the U.K. has to compete much harder for that business than ever before. The almost inevitable result is that some U.K. entities are gradually shrinking as functions move from the U.K. to their new center of gravity.

At the moment, it is not clear if or when Brexit will occur, or whether it will be on a deal or no-deal basis. As a matter of both U.K. and EU law, the U.K. will leave the EU on Oct. 31, 2019, unless the U.K. and the EU agree to extend the deadline.

Regardless of the present uncertainty, the very largest institutions have finished their groundwork. When the date and manner of Brexit is known, there may or may not be another push to move their European business out of the U.K., with people and jobs following.

For smaller businesses, however, there is still work to be done. And for some, there is everything still to do.

But where to start? Perhaps surprisingly, the first question is: Are you actually using the ability to passport between the UK and the EU? If you are a U.K. insurer and are insuring risks in the rest of the EU (or vice versa), then the answer is yes. If you are established in the U.K. as a non-insurance business and have a branch in another country (or vice versa), then the answer is certainly yes.

However, many non-insurance businesses are surprised to learn that if they are doing everything on a cross-border services basis, the answer is often “no, you’re not using the passport” under U.K. law, or the law of any other relevant European country. The reasons for this will vary from case to case. However, it is reasonably common to find that the passport is not being used as a matter of U.K. law, if a U.K. business has its entire infrastructure in the U.K. and it only responds to incoming communications from its non-U.K. customers (rather than initiating communications with them); and the U.K. business is not using its passport under the law of at least some other EU countries, for the same reasons.

If you are in the lucky position where you are not using the passport, life will carry on without interruption, even if there is a hard, no-deal Brexit.

If you are using the passport, you need to act fast if you want to avoid a no-deal Brexit interruption to your business. Some countries are making a temporary permissions regime available, which would allow firms using a passport to operate for a limited time while they seek full authorization. If you are a U.K. firm and have a branch in one of the countries with a temporary permissions regime, you might still be able to register for it. If you do, you might be able to carry on as normal for a while, provided you make a successful application for a permanent permission in the relevant countries and you do it quickly enough.

If a temporary permissions regime is not available, or you don’t qualify for it, some counties are offering a contract runoff regime that would allow some passporting to service existing contracts and wind down operations. If you qualify for that and there is a no-deal Brexit, you will be able to honor your existing obligations across borders. However, new cross-border services business will have to stop.

Strictly speaking, if there is a no-deal Brexit, and you cannot get into a temporary permissions regime or runoff regime of one kind or another, then everything might have to stop. Dead. If a company is caught with a passporting problem and wants to passport its business throughout the EU, it should begin investigating, prior to the date of the occurrence of Brexit, about locating an office in an EU country. The EU country will generally automatically allow passporting throughout the EU. Generally, this will need to be a business formed in the EU country chosen and the U.K. entity likely will be an affiliate, subsidiary, or sister company.

The U.K. has established a temporary permissions regime for European businesses that provide services on a cross-border basis into the U.K., and for businesses that have U.K. branches. It is too late for banks and insurers to qualify for that now, but there is still time for most other firms — if they are quick. The U.K. has also made a contract runoff regulation so that firms that do not get into the temporary permissions regime can honor their existing obligations. Without these things, everything will have to stop if there is a no-deal Brexit.

The alternative is to hope that the withdrawal deal just agreed upon between the U.K. and EU is ratified by both parliaments. That is because the withdrawal deal includes a transition period that will allow everything to continue as before – but only until the end of 2020, unless the U.K. and EU agree on an extension, and that can only be done once.

Agreement on an extension must also be reached by July 1, 2020, and it can only be for up to two years. Whenever the transitional period expires, there will be the hardest of hard Brexits unless a free trade agreement has been concluded in the meantime. Three and a half years to negotiate a withdrawal agreement, and less than that to negotiate a trade deal? Time really is that short.

Topics Europe Uk