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Brexit-related information for banks

Paradigm shift

Citizens, businesses and public administrations need to adapt to a paradigm shift: at the end of January 2020, the United Kingdom left the European Union (EU). Eleven months later, on 31 December, the transitional period during which the country has remained part of the single market and the customs union comes to an end. 

Following intense negotiations, the EU and the United Kingdom reached an agreement in December that will broadly shape their future relationship in many areas of economic life. 

The agreement will enter into force on 1 January 2021, initially on a provisional basis. The provisional application of the agreement, which the European Council is expected to ratify by the end of 2020, is to apply until 28 February 2021 at the latest. Before that date, the European Parliament will decide on the unlimited application of the agreement. 

However, the provisions of the agreement have only limited applicability to financial services insofar as the supervisory law of the EU and the United Kingdom will, in principle, continue to apply, unless other provisions are adopted – for example, on the basis of equivalence decisions by the European Commission. 

From a regulatory perspective, the United Kingdom becomes a third country once the transitional period expires at the end of December 2020. From January 2021, financial service providers with a registered office in that country will no longer be able to use European passporting arrangements, which have allowed them access to the entire European Economic Area (EEA) up to now.

Therefore, unless European or national supervisory law explicitly states otherwise, enterprises with a registered office in the United Kingdom that wish to continue providing cross-border financial services in the EEA without interruption needed to establish a branch in an EEA country by the end of the transitional period.

However, applications for authorisation can still be submitted. In Germany, the conditions for the authorisation requirement and the authorisation procedure are governed by the German Banking Act (Kreditwesengesetz), the Insurance Supervision Act (Versicherungsaufsichtsgesetz), the Payment Services Oversight Act (Zahlungsdiensteaufsichtsgesetz) and the Capital Investment Code (Kapitalanlagegesetzbuch).

Exit from the European Union (EU)

On 31 January 2020, the United Kingdom left the European Union (EU). As agreed upon in the Withdrawal Agreement, a transition period lasting until 31 December 2020 also commenced at that time. For now, nothing has changed for financial intermediaries. Nevertheless, affected financial intermediaries should use this time to make appropriate preparations for the post-transition period. Due to the close economic and legal ties between the EU Member States and the United Kingdom, Brexit will have far-reaching consequences for credit institutions and financial service providers active in Europe. This holds true in both economic and supervisory terms.

Access to the single European market is a major aspect in this context. At present, many financial intermediaries benefit from what are known as EU passporting rights, which authorise banks in the European Economic Area (EEA) to serve their customers throughout the entire EEA using just a single EEA-licensed entity. However, as things currently stand, the use of these EU passporting rights with the United Kingdom will cease in both directions once the transition period comes to an end. Against this backdrop, banks must re-examine their location policies.

With regard to establishing new entities or expanding existing entities in Germany, the Federal Financial Supervisory Authority and the Deutsche Bundesbank are available to assist you in Brexit-related issues pertaining to banking and financial regulation, payment transactions and market operations.

European Commission issues readiness communication

At the end of the year, the transition period agreed upon between the European Union (EU) and the United Kingdom (UK) for the period following the UK’s withdrawal from the EU on 31 January 2020 will come to an end. Against this background, the European Commission issued a “Communication on readiness at the end of the transition period” on 9 July 2020 (see link below), which was successively supplemented by sector-specific readiness notices.

These notices are intended to help national authorities, enterprises and citizens to prepare for the changes that will come after the end of the transition period. This was set out to ensure that EU rules would remain applicable during this time and that enterprises would be able to prepare for the new legal and economic relationship between the EU and the UK.

The communication provides a sector-by-sector overview of the most important areas that will see changes, regardless of the outcome of the ongoing negotiations between the EU and the UK. In particular, the following areas are affected:

  • Banking and payment services 
  • Credit rating agencies
  • Asset management 
  • Institutions for occupational retirement provision
  • Post-trade financial services
  • Investment /market trading
  • Insurance and reinsurance 

The relevant publications can be found below under the heading "Preparations for the end of the transition period".

The negotiations on a free trade agreement began in March 2020 and are still ongoing. It is uncertain whether a free trade agreement will be concluded by the end of the transition period.

With regard to whether future cross-border financial services will be permissible under supervisory law in the new relationship between the UK and the EU, decisions will need to be made in many areas primarily on the basis of unilaterally recognising the “equivalency” of the other party’s supervisory regime. The analyses required in preparation for these decisions are also still ongoing at present.

Legal framework