Brexit Industry InsightsBankingWith the UK’s default to leave the EUwithout a deal, the banking sector isvulnerable to disruption. The sector is facedwith simultaneously navigating businessgrowth in a maturing market and increasedregulatory pressures, whilst mitigatingthe impacts of Brexit – including the freemovement of capital and market access.The winners will be those in the sectorprepared for change and alive to theopportunities.September 2019Several factors ensured the financial services industry wasamong the first to begin Brexit preparations, includingregulatory barriers to the continuity of service provision, thetime taken to secure the correct authorisations and licences,and the importance of the industry to the wider economy.Nevertheless, the European Central Bank (ECB) recentlypublished a newsletter1 calling on businesses to step uptheir no deal preparations, noting where contingency planshave not been implemented, ‘banks should step up theirpreparations to minimise execution risks’ and addressoperational challenges in readiness for implementing thetarget operating model agreed with supervisors.As the financial services sector is among the most mature inits preparations for Brexit and has been through the processfrom impact assessments to implementation, there arelessons that can be taken and applied to the preparation ofother sectors of the economy.Brexit and the Banking SectorThe financial services sector is an essential part of the UKeconomy with exports of 61bn in 2018, 43% of which went tothe EU2, and over 1.1 million people employed in the industryin the UK alone3. The banking sector in the UK will be amongone of the most impacted industries due to the level ofregulation market participants are subject to, and the level ofinterconnection between the UK and EU banking systems.The banking and wider financial services industry is a vitalcomponent of the UK economy, facilitating payments,investment and ensuring the rest of the UK can trade. A lackof market access for the UK financial services system to theEEA market may negatively affect the performance of the UK’seconomy. The potential impacts on investment, access tocapital and the ability of banks to continue providing the sameservices as they currently do, could all have a negative impacton other industries.1.ECB newsletter: l2.Briefing Paper, House of Commons Library - Financial services: contribution to the UK economy. Available at: ents/SN06193/SN06193.pdf3.Key facts about UK-based financial and related professional services 2019. Available services-2019/5.Equivalence decisions: From the outset, the EU made it clear that it would not grant mutual recognition to the UK’s financial services industry. Concerns about theEU’s equivalence regime including a lack of comprehensiveness, lack of transparency in the decision making process and the possibility of unilateral withdrawal ofequivalence, combined with concerns around third country regimes under EMIR, encouraged firms to take prompt action following the referendum.
Brexit Industry Insights What does this mean for business?In focus- regulatory recognitionSome of the key implications for businesses operating in the sector are:PassportingCurrent passporting arrangements which allow UK banks to operate in the EUwith minimal authorisation, and vice versa, may come to an end. This would applyextra costs on UK-EU financial services trade as institutions would have to overcomesignificant regulatory hurdles to be able to continue in the provision of these services. Itwould put UK banks at a disadvantage in the provision of services in the EU.We have seen more of a sense of urgency in businesses passporting from the UK thanthose passporting from the EU. This is due to the transitional measures provided by the UKgovernment - including the temporary permissions regime - which will allow EU businessesto passport services into the UK for a limited period of time post-Brexit. Although the EUhas issued transitional measures for capital markets and there have been Memoranda ofUnderstanding (MoU) signed between EU and UK regulators, contingency planning hasbeen done at the national, rather than an EU-wide, level.Corporate treasuryCash management services are typically not dependent on EU passporting.However many banks have been making changes to their product and corporateentity strategies, driven by numerous factors including the bank’s own legal and regulatoryframework. Therefore although Brexit may not necessitate changes directly, decisionstaken by banks in other areas may impact the ability to continue offering the same servicesto clients.Legal entity structuresUK banks holding branches in the EU may have to convert those entities tosubsidiaries, a costly process, in order to continue providing financial services.Contract RepaperingAs the UK becomes a third country, there may be a need to repaper contractsto reflect the UK’s new legal status. In addition to transferring permissions to EUentities, banks will be required to migrate relevant customer contracts to these entities.This is a significant task but one that is necessary to continue offering the same level ofservice to clients.TaxRestructuring in response to regulatory barriers has resulted in a number oftax issues for companies to manage, including assessing whether the activitytransitioning to a new EU company is a transfer of a business going concern (i.e. withgoodwill or intangibles attached) in order to determine potential exit tax charges andassociated valuation issues.Post-restructuring, the tax implications for ongoing operations present different taxchallenges. For example, new cross-border charges for services provided by an old UKhub company to a new EU company will have transfer pricing and VAT implications. As willback to back arrangements where the UK company seeks to continue some of the keyentrepreneurial risk-taking functions in respect of the financial assets that may now beoriginated and entered into by the EU company with EU customers. The employment taxposition for staff moving to new locations will need to be considered.02Equivalence Decisions:A third country can be grantedequivalence by the EuropeanCommission in certain areas if theydeem that country’s standardsand regulatory regimes to be of anequivalent standard to the EU’s. Thiswould allow that country’s financialservices covered by the equivalencedecision to access the EEA marketwithout the need for separateauthorisation in each jurisdiction.This can be withdrawn unilaterallyby the European Commission (EC) atany time.Memoranda of Understanding(MoUs):A framework in which supervisoryauthorities agree to cooperate andshare information. There have beenseveral MoUs signed between UKand EU supervisory authorities tocontinue cooperating in the event ofa no-deal Brexit.The UK’s banking regulators, theFinancial Conduct Authority (FCA)and the Prudential RegulatoryAuthority (PRA), have agreedbilateral MoUs with their Europeanequivalents including the EuropeanBanking Authority. These MoUs setout the expectations for supervisorycooperation and information sharingbetween the UK and EU/EEA nationalregulators.Adequacy and personal data:Personal data flows are regulatedby the EU. Without the EU grantingan adequacy decision, there wouldbe restrictions on the flow of databetween the UK and the EU. TheCommission is not expected to startthis process in respect of the UKuntil after the UK leaves the EU. TheUK’s Information Commissioner’sOffice has indicated that for a
Brexit Industry Insights PeopleUnder a no deal, free movement of people will end once the UK leaves the EU.EU/EEA citizens resident in the UK before 31 October 2019 will retain their rightsto settlement and access to services, and they will need to apply under the EU settlementscheme by 31 December 2020. EU/EEA citizens moving to the UK after 31 October 2019will for a transitional period be able to move to the UK to live and work as they do now.But those wishing to stay beyond December 2020 will either need to apply for EuropeanTemporary Leave to Remain by 31 December 2020 or leave the UK. The UK is expected tointroduce a new immigration regime from January 2021 for all EU nationals arriving in theUK after this date.Multinational banks often have a highly mobile international workforce and are reliant onthe efficient deployment of individuals around the world including within the EU. PostBrexit changes will need to be factored into existing processes to avoid delays in puttingfeet on the ground and/or increased costs. For example, immigration requirements for UKnationals planning to work in the EU will need to be confirmed on a country-by- countrybasis including expected time lines for completion of the immigration process.Dual social security liabilities could arise for employers and mobile employees if memberstates do not agree to reciprocal arrangements with the UK.Preparation so farThe financial services sector as a whole was one of the first to mobilise resources anddevelop comprehensive plans to mitigate the impact of a no-deal Brexit scenario. As thebanking sector is one of the more mature sectors in terms of Brexit readiness, there arelessons to be learned which could be applied to other industries.From our experience in the industry and through interactions with clients, we have seenthe key drivers of the relatively high degree of readiness for Brexit in the industry include: Importance of regulatory change to the industry:Most European investment banking activity takes place in London, with businessesrelying on existing European regulatory passports whereby London operations canserve the rest of Europe using one licence. The loss of passporting rights meansmany businesses simply cannot offer regulated services to the EU27 market fromLondon without establishing an EU27 entity, in the absence of an equivalencydecision for the UK’s financial services system4. Regulatory Timeframes:Businesses that established a new EU27 entity, or applied for authorisation fromlocal regulators for an existing EU27 entity, had to allow sufficient time to have therelevant authorisations in place. Typically, the authorisations required by firms takearound six to nine months, which necessitated an early response from affectedfinancial services businesses.time limited period in a no-dealscenario it will recognise EEAstates as providing an adequatelevel of protection for personaldata. However, this statement hasnot been reflected by the EU andtherefore for business the criticaldata flows to assess are thosepersonal data flows originatingfrom the EEA. Unless the UKand the EU enter into a separatelegal agreement, businesseswill need to ensure appropriatelegal safeguards (e.g. standardcontractual clauses and for intragroup transfers, binding corporaterules) are in place to facilitate crossborder flows of personal data.Case studyDeloitte aided a leading global USinvestment bank on its strategy tomanage Brexit and the changesthis will have on its business andoperational model. We helped theclient: Perform a Brexit impactassessment. Design and implement fundingmodels for a new entity with frontto-back trade flows for all productclasses. Create a margin and collateralapproach to enable Europeanclients to continue trading activitypost-Brexit. Analyse tax consequences ofbusiness change including onimplementation and under thefuture-state operating model. Assess the client asset protectionrequirements of the new regulator,formulating a plan to adapt thecurrent client assets architecture.We successfully brought togethermultiple business functions that hadbeen operating in silos, and applied asystematic approach to manage thecomplexity and volume of analysisrequired.03
Brexit Industry Insights Cooperation between the EU and UK regulators:There has been strong cooperation between the EU and UK regulators, includingworking groups set up by the ECB and the Bank of England. This has manifesteditself in MoUs signed between competent authorities which aim to provide businesscontinuity and minimise disruption in the event of a no-deal Brexit. These MoUsinclude those signed between the FCA and European Securities and MarketsAuthority (ESMA) that will allow certain activities, such as fund manager outsourcingand delegation to continue to be carried out by UK-based entities on behalf ofcounterparties based in the EEA. Regulatory supervision:The FCA and the PRA have been transparent and communicative about theirexpectations of market participants through regulatory outputs and educationalbriefings, while also conducting supervision to ensure firms are making appropriatepreparations. The FCA and PRA also required regulated firms to plan for thescenario of maximum change, i.e. a no-deal Brexit, and demanded evidence offirms’ preparations to ensure the industry is sufficiently planning.What can businessesdo to prepare?From our engagements with clients, wehave seen several common actions takenby banks that have driven the relativesuccess and maturity of the industry,these include: Monitoring regulatory developments:Banks have benefitted from havingdeveloped compliance functionswhich monitor developments fromregulators. These functions have beenintegral in examining the regulator’spublications and incorporating them intoBrexit preparations. Redirecting resources to build projectteams to work out what changes arenecessary and when to make them:Banks were amongst the first firmsto create Brexit taskforces whosepurpose was to identify risks anddevelop mitigation plans. By actingquickly after the referendum, banksafforded themselves the time tomake comprehensive plans leading tostructural and operational changes tominimise the disruption to business asusual operations. Identifying “decisions of no regret”: Thelasting uncertainty around Brexit meansbusinesses could not plan for a particularfuture state. By using the scenario ofmaximum change as a basis for planningbanks were able to identify decisionsof no regret which would benefit theirbusiness, or at least minimise disruption,independent of the future relationshipbetween the UK and EU27. Using Brexit as an opportunity to testresilience and operational efficiency: Thebulk transfer of existing portfolios fromUK counterparties to EU counterpartiesprovided an opportunity to test theindustry’s technological resilience. Thishelped to identify and address areas ofweakness in banks’ technology systems. Manage all key stakeholders tounderstand commitments andexpectations. Engage with auditcommittees and liaise with trade bodiesand regulators on preparations.04
Brexit Industry Insights Brexit Industry Insights Further readingHow can Deloitte help?Deloitte has been supporting multiple businesses across a range of industries tounderstand the implications of, and prepare for, the UK’s withdrawal from the EU. We havesupported many clients with their Brexit planning. Our teams combine Brexit insights,industry knowledge and technical expertise to support our clients with their Brexitreadiness planning – from risk assessment to applying the lessons learned to optimise forthe future trading environment.No-deal guidance for the bankingsectorFor further information please contact Deloitte Brexit Support firstname.lastname@example.orgUK Business Preparation Tool:Prepare your business ororganisation for BrexitIndustry contactsAmanda TickelPartner, Global Brexit LeadTel: 44 (0)20 7303 3812Email: email@example.comVishal VediPartner, Financial ServicesBrexit LeadTel: 44 (0)20 7303 6737Email: firstname.lastname@example.orgFrancesco BellasiDirector, Capital MarketsTel: 44 (0)20 7007 1756Email: email@example.comUK No-deal Technical Notices:Banking, insurance and other financialservices if there’s no Brexit dealEuropean Commission BrexitPreparedness:Financial Services and Capital MarketsUnionFurther guidance:FCA Brexit guidanceBank of England Brexit pagesESMA Brexit guidanceEuropean Central BankThis no-deal guidance is notexhaustive. Companies shouldroutinely review the latest officialupdates and technical guidance as andwhen they are published by the UK, EU,and individual EU Member States.This publication has been written in general terms and we recommend that you obtain professional advice before acting or refraining from action on any of thecontents of this publication. Deloitte LLP accepts no liability for any loss occasioned to any person acting or refraining from action as a result of any material inthis publication.Deloitte LLP is a limited liability partnership registered in England and Wales with registered number OC303675 and its registered office at 1 New Street Square,London EC4A 3HQ, United Kingdom.Deloitte LLP is the United Kingdom affiliate of Deloitte NSE LLP, a member firm of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee(“DTTL”). DTTL and each of its member firms are legally separate and independent entities. DTTL and Deloitte NSE LLP do not provide services to clients. Please seewww.deloitte.com/about to learn more about our global network of member firms. 2019 Deloitte LLP. All rights reserved.Designed by CoRe Creative Services. RITM029207105
The banking and wider financial services industry is a vital component of the UK economy, facilitating payments, investment and ensuring the rest of the UK can trade. A lack of market access for the UK financial services system to the EEA market may negatively affect the performance of the UK’s economy. The potential impacts on investment, access to capital and the ability of banks to .
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2. R.K. Gupta, Banking - Law and Practice (2nd ed. 2008) 3. Mark Hapgood, Paget’s Law of Banking (13th ed., 2007) 4. M.L. Tannam, Banking Law and Practice in India (23rd ed., 2010) Topic 1: The Evolution of Banking Services and its History in India History of Banking in India, Bank Nationalization and social control over banking, Various
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