The EU financial services framework will cease to apply after the UK exit from the EU: The regulatory framework and financial passport that has enabled EU-based customers to access a diverse suite of crossborder financial products and services from UK-based banks will cease to apply after the UK exit from the EU. This potentially creates significant uncertainty for EU-based businesses, including as to the continuity of their cross-border financial contracts which support their funding and risk management. Due to the significant importance of this for UK and EU businesses, AFME and UK Finance have come together to highlight this issue for policymakers.
• The existing stock of cross-border contracts with customers will be affected: Prompt action is required to provide the necessary clarity that these contracts will continue after the UK exit from the EU. It is estimated that €1.3 trillion of UK-based bank assets are related to the cross-border provision of financial products and services to a variety of customers ranging from governments and businesses to individuals. These services are supported by a very significant volume of contracts.
• Contractual uncertainty of cross-border contracts needs to be addressed promptly to avoid damaging impacts: Both the UK and the EU have a shared interest in ensuring that the issue of contractual uncertainty on the stock of cross-border financial contracts is addressed at an early stage as part of the negotiations: this is to avoid any damaging impacts on business, additional costs for customers and disruptive economic effects for the UK and the EU. In the absence of a blanket solution each contract will need to be individually assessed to determine if elements to be performed constitute a regulated activity no longer authorised under the EU passporting regime and whether the national laws of the Member State where the customer is located nonetheless permit the activity. This uncertainty and the potential need to transfer or restructure contracts could have a significant impact on customers.
• There is precedent for dealing with contractual uncertainty when legal regimes change: Uncertainty of this sort relating to the treatment of an existing stock of contracts during a period of transition between two legal regimes is not without precedent. For example, an EU-wide solution was adopted to address uncertainty around the introduction of the euro currency and around the new regulations on OTC derivatives, central counterparties and trade repositories.
• A range of actions are available to the EU, the UK and individual EU Member States to address cross-border contractual uncertainty: A range of actions are potentially available to the EU, the UK and individual Member States to manage any damaging impacts from undermining existing contracts or requiring contracting parties to engage in economically unproductive and unnecessary restructuring within a very compressed period of time.
• A transition period may be put in place as part of broader transitional arrangements that confirms the legal right to contract in this way for a defined period. This will allow banks and their clients in the EU and the UK additional time to transfer or restructure the relevant contract and/ or put in place alternative financial arrangements.
• In conjunction, existing contracts, subject to certain limitations or conditions, should be allowed to continue and run to maturity.
• The UK and individual EU Member States may also consider grandfathering contracts under their existing national licensing regimes where appropriate.
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