UK: Key Issues For Contingency Plans

There are a number of considerations that affect firms to a greater or lesser extent, depending on their activities and

U.K./EU presence and customer base. Properly developed contingency planning will enable a firm to utilise resource-and capital-efficient structures that avoid unnecessary costs. It should be possible for a firm to establish relevant steps and structures to promote the firm's and its clients' compliance with legal and regulatory obligations and that rely as little as possible on political outcomes, legislative changes and/or government or regulatory approvals. Firms should be considering the questions below.

  1. In which EU jurisdictions does the firm have offices?
  2. In which EU jurisdictions does the firm have customers?
  3. In which EU jurisdictions does the firm have suppliers?
  4. How would relevant permissions and rights change as a result of a "hard" Brexit without mutual recognition or equivalence?
  5. Does the firm envisage that it will need to restructure and/or relocate in order to continue to service its client base?

  6. Are there any acceptable adjustments clients could be assisted in making which would reduce the cost?
  7. Are there other methods available to recharacterize or adjust business delivery to minimize cost implications?
  8. How does the firm anticipate its business model changing as a result of a hard Brexit? Do the costs of restructuring exceed the benefits of EU access?
  9. Is the firm considering whether to withdraw from business lines that may be rendered less economically viable were EU access to be lost?
  10. What additional regulatory approvals are likely to be required, either in the U.K. or in the EU?
  11. Will existing EU or U.K. branches operated by the firm be required to subsidiarize?
  12. Will the PRA require its U.K. branches to subsidiarize (including taking into account the PRA's approach to the supervision of international banks, which includes consideration of whether the business conducted through the branch exceeds de minimis thresholds of £100m in retail and SME deposits and/or 5,000 retail/SME customers)1?
  13. For firms currently operating through EEA branches in the U.K., how will operating in the U.K. as a PRA- regulated branch or subsidiary differ from operating as an EEA branch? What governance-related and contractual steps should the firm be taking into account in order to transition from an EEA branch to a U.K. regulated entity?
  14. What changes to IT systems will be required?
  15. Will the firm need to make changes to its outsourcing arrangements? How will third party outsourcing controls need to be amended? Will changes to outsourcing arrangements give rise to new third party dependencies?
  16. Will the firm's group structure bring it within the scope of the proposed requirement to establish an intermediate EU parent undertaking2?
  17. How many EU employees in the U.K. does the firm have? How many U.K. employees in the EU? Does the firm anticipate changes to its headcount or immigration issues for its employees?
  18. Has the firm identified the key personnel that will hold senior roles and/or significant management functions? Has the firm considered the reporting lines within the group?
  19. Which EU financial market infrastructure is accessed from the U.K. and vice versa?
  20. Are there workarounds to market infrastructure access, eg by encouraging U.K. providers to offer lookalike precedents?
  21. 21. Can the firm amend its contracts with customers to facilitate future service provisions using reverse solicitation or similar techniques (as discussed below under "Minimizing the need for relocation")?

Consideration of these initial questions allows more granular planning to be instigated based on a firm's own circumstances and those of its group. Any planning must also take into account the impact of relevant forthcoming legal and regulatory changes affecting the firm, given that the U.K. remains an EU member state until the point of exit from the EU and, as a member state, remains bound by EU law and regulation. The U.K. is also committed3 to implementing "pipeline" EU reforms that come into effect prior to EU withdrawal. 4 Firms will need to engage with the shape of this legislation in a post-Brexit U.K. in terms of cost savings whilst remaining in conformity with any enhanced equivalence deal that may transpires.

Footnotes

1 The PRA's published approach to international banks is set out in PRA Supervisory Statement SS10/14: Supervising international banks: the Prudential Regulation Authority's approach to branch supervision, available at: http://www.bankofengland.co.uk/pra/Documents/publications/ss/2014/ss1014.pdf. See footnote 7 above for details of the PRA's proposals for revisions to SS10/14.

2 See proposed new Article 21b, Capital Requirements Directive. We discussed the implications of these proposals in our Client Note, Implications for Non-EU Banking Groups of the EU's New Intermediate Holding Company Proposals, available at https://www.shearman.com/perspectives/2016/12/implications-non-eu-banking-groups-of-new-proposal.

3 See FCA Statement following UK referendum result, June 24, 2016, available at: https://www.fca.org.uk/news/statements/statement-european-union-referendum-result.

4 A non-exhaustive list of recent and forthcoming legal and regulatory obligations arising from EU membership includes: MiFID II/MiFIR; PRIIPs Regulation; Securities Financing Transactions Regulation; NIS Directive; General Data Protection Regulation; UK Financial Services (Banking Reform) Act; CRD V/CRR II package; the Securitisatio Regulation; the IFRS 9 Regulation; the potential prudential regime for smaller investment firms; the BRRD reforms; Proposed amendments to EMIR; and proposals relating to clearing euro-denominated assets.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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