With a little ingenuity, it is possible for firms to avoid moving meaningful business to the EU-27. There are a number of workarounds1. The City of London has been a global financial centre for centuries. Current methods of service provision, contractual terms and product sales to EU customers might need to be adjusted to match more closely those used for rest-of-world customers. As evidenced by the levels of non-EU business in the City and substantial business done by U.S. institutions with EU customers, the recent EU innovation of the passport, which has effectively been in place properly only since 2007 for investment business, is by no means essential for the servicing of EU customers.
Talk of a cliff edge for financial services contracts has been exaggerated. As we explained in our previous client note on continuity of contracts on a "hard" Brexit, performance under most the terms of financial instruments in existence on Brexit, including derivatives and insurance contracts, should be protected as "property under human rights laws," placing the onus on EU regulators to demonstrate why rendering such contracts unlawful could be justified in the public interest. Using techniques such as reverse solicitation, it should be possible to adjust existing contractual arrangements so as to future-proof those arrangements for quite some time after Brexit.
The likelihood of some form of mutual recognition or enhanced equivalence deal between the U.K. and EU after Brexit should also be considered. This would preserve the status quo in terms of U.K.-EU access. It could also allow for some improvement and refocusing of U.K. regulation so as to permit more judgement-based supervision, high standards and fewer rules, which is the U.K.'s traditional style of regulation2..
It should also be considered, when deciding future business structures and strategy, whether the U.K. is likely to remove regulatory red tape and lower taxes in the event of a no deal outcome. The likely future nature of EU regulation should be considered as well.
It is important to ensure any legal structures adopted are properly tested in law and not driven by political assertions of what the law is or might be.
Footnotes
1 See, for example, those set out in A Blueprint for Brexit, A: the future of global financial services and markets in the UK, Barnabas Reynolds, available at http://www.shearman.com/~/media/Files/NewsInsights/Publications/2016/11/Barnabas-Reynolds--A-Blueprint-for-Brexit.pdf.
2 For discussion of a possible expanded or enhanced framework for equivalence decisions see A Template for Enhanced Equivalence: Creating a Lasting Relationship in Financial Services between the EU and the UK, Barnabas Reynolds, available at http://www.shearman.com/~/media/Files/NewsInsights/Publications/2017/07/LNDOCS011040030v16ConsolidatedAnEquivalenceRegulationFINAL02.pdf.
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