Newsletter Brexit July 2016

How the impending Brexit impacts the legal framework of doing business with the UK – the German perspective: Banking and capital-market law

Reciprocal market access for financial undertakings/companies

  • Brexit would initially have direct effects on the UK business of German-based financial companies (banks, financial service providers, investment management companies and insurance companies). At present, these financial companies can operate in the UK - either through cross-border services or via branches - on the basis of their German license, without needing a separate license in the UK. It is sufficient for the companies to notify their corresponding intention to the responsible German supervisory authority, which then informs the supervisory authorities in the UK (so-called European Passport). This option would no longer apply after the UK leaves the EU. It remains to be seen to what extent the withdrawal negotiations produce an agreement on comparable reciprocal access to the respective market for financial companies. Given this background, German financial companies should carry out a timely check on how they can structure and continue their UK business after Brexit. There are several options open to companies in this respect. They depend in particular on the scope of the business and the client group in the UK (professional or private clients).
  • A Brexit would have noticeably farther-reaching consequences for German-based branches of UK financial companies. These branches currently operate in Germany under the European Passport, and do not therefore require a separate license in Germany. The lapsing of the European Passport would mean that the branches would no longer be authorized to conduct business in Germany. There are various options available to the branches if they wish to continue operating in Germany. For example, the branch could act purely as a representative office in Germany. In this case, however, the representative office would not be allowed to provide financial services or banking services. The branch could also apply to the German supervisory authorities for a license to offer the services previously provided, or for brokering services. Additionally, it would be possible to restructure the branch into a subsidiary of the British company, and to apply to the German supervisory authorities for a corresponding license for the subsidiary company. In this case, the German subsidiary could also engage in cross-border operations in other member states of the EU via the European Passport.
  • Fundamentally speaking, financial companies based in the UK would no longer be able to provide cross-border banking services or financial services in Germany after Brexit, subject to possible rulings in the exit negotiations.  If corresponding services are provided and completed prior to Brexit (for example awarding of a non-revolving credit facility) these will not be affected by Brexit. In the case of banking business and financial services started before Brexit and that are to be continued thereafter (for example awarding of a revolving credit facility, asset management contracts), both parties should ensure timely clarification of how these services can continue to be provided by the British company, even after a Brexit.
  • Within the framework of existing business relationships between British financial companies and German clients, it will frequently be possible to continue providing the corresponding services on the basis of the passive free movement of services. However, it is not possible to actively establish new relationships with German clients in the context of the passive free movement of services. Nevertheless, British companies can apply to the Federal Financial Supervisory Authority for exemption from individual supervisory-law rulings, concerning the cross-border provision of banking and financial services to institutional clients in Germany.  In this case, the British company can provide cross-border banking or financial services for German institutional clients, without the need for a separate license in Germany. Swiss banks and financial service providers frequently make use of this option. Alternatively, British companies can set up a branch or subsidiary in Germany that then works for German clients. Nevertheless, the branch or subsidiary requires a license from the Federal Financial Supervisory Authority for the provision of the respective banking or financial services in Germany.

Securities prospectuses

Brexit would also have consequences for the cross-border offering and approval of securities prospectuses. At present, a securities prospectus approved by the responsible authority in the member state of origin, can be used in all EU/EEA countries for stock-market admissions or public offers of the respective security without an additional approval procedure. This possibility would no longer apply following a Brexit. Prospectuses approved in the UK would no longer automatically be valid in the EU. An additional approval procedure could be required for stock-market admissions or public offers of the respective security as long as no other ruling has been made on equal-value recognition.

Investment funds

  • Investment management companies based in Germany will no longer be able to sell the UCITS (Undertakings for Collective Investments in Transferable Securities) and AIF (Alternative Investment Funds) managed by them, or UCITS and AIF from other EU member states, in the UK under the European Passport after a Brexit. This will probably require application for a separate selling license in the UK, unless facilitated selling is incorporated into the withdrawal negotiations. In addition, investment management companies should check the investment conditions and investment restrictions for their funds, and possibly adjust these in terms of the admissible geographical allocation and the investment limits. A check must also be carried out on the ability to acquire any target funds, launched in the UK, after Brexit. This also applies to other companies or institutional investors who have to observe investment requirements when making their investment decisions (for example insurance companies, pension funds, foundations etc.). These companies should also carry out a timely check on the effects of a Brexit on the risk classification of individual assets held. If German investment management companies have appointed a custodian in the UK for funds managed by them, they must appoint a new custodian for these, as the custodian of AIF or UCITS must be situated in a member state of the EU.
  • Investment management companies based in the UK will no longer be able to engage in cross-border management of UCITS or AIF from other EU member states following Brexit. UCITS and EU AIF launched in the UK will probably lose their corresponding status as UCITS and EU AIF, as they will no longer have been launched in an EU member state. After Brexit, these funds could only be sold in the EU in accordance with the regulations for funds from third countries (for example funds launched in the USA or the Cayman Islands).


The present widespread agreement of English law for syndicated loan agreements may be called into question for the time after a Brexit, as it is currently not clear what the precise content of English law will be following a Brexit. Even the current popular use of the English "Scheme of Arrangement" for complex restructuring measures could become less important for companies and creditors outside the UK in future, at least as long as the content of the applicable English law and its recognition in the EU member state are uncertain (see Section 10, Subsection "Schemes of Arrangement").

Further aspects

Following a Brexit, EU financial institutions could be obliged to sell bonds secured through British mortgages, bank loans or credit-card claims, because these would carry a higher political risk following a Brexit, or the European financial supervisory authorities could also forbid the holding of such bonds as liquidity reserve. Overall, there would then also be a need for a new risk assessment on financial market products.

In addition, UK CCPs (Central Counter Parties) would require formal recognition under EMIR, in order to be able to continue working in the EU Single Market in future. A CCP based outside the EU can only provide corresponding services if it has previously been recognized by ESMA as supervisory authority.

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