The Great Repeal Bill: Helping to remove the phantom financial services ‘cliff edge'

 
Barnabas Reynolds
BRITAIN-EU-POLITICS-BREXIT-ECONOMY
There are more safeguards in place than many believe (Source: Getty)

Tomorrow, Tuesday, is a big day for implementing Brexit. The House of Commons will begin the Committee stages and debate the detail of the Great Repeal Bill.

The measure will give businesses the certainty they need to plan for Brexit, knowing the current legal framework under which they operate will be repatriated to Westminster. Some MPs, however, appear determined to do things differently and over 400 amendments to the Bill have been proposed. While the most troubling seem to be those designed to adopt parts of EU constitutional law into UK law – so weakening the sovereignty of parliament and adding uncertainty to our well-tested UK parliamentary system – others are designed to delay the date for Brexit.

The idea here is to avoid an alleged “cliff edge” which some claim could exist if there is no EU trade deal, especially for cross-border financial services contracts.

Read more: Theresa May to meet EU business bosses in Brexit charm offensive

Talk of an impending cliff edge has gripped many in the City. Doomsayers contend that, without a trade deal, the loss of passporting rights for financial institutions and EU regulation could make honouring existing contracts illegal.

These fears are misplaced. The “cliff edge” is largely in the mind and the Great Repeal Bill will help to remove its vestiges. That’s because international law and human rights laws protect most existing financial contracts from falling over any cliffs.

Moreover these protections can generally be combined with EU measures allowing wholesale market customers to opt out of EU financial regulation entirely when buying (purchasing services and products) from outside the EU – a process known as reverse solicitation. This means it should be possible to continue to perform existing financial contracts and to service existing customers after Brexit.

For much of the City, even these protections are unnecessary.

For a start, many pre-existing financial contracts will not be affected by local EU member state licensing requirements post-Brexit. The regulated activity will have taken place when the contract was entered into, and so any future performance after Brexit will not need a licence. Second, many other financial contracts do not involve cross-border dealings in law at all. The performance of the contract will remain solely within the jurisdiction of UK regulators.

What about the remainder, a relatively small subset of financial contracts that could involve local authorisation requirements in some EU member states? This is where property rights and international law protections come into play.

Read more: Lords demand the chancellor agrees a "post-Brexit standstill" for financial services

The right to property protects rights under contracts between UK and EU27 businesses that exist prior to Brexit. It arises both in the European Convention on Human Rights, to which the UK and every EU27 state will remain a party and in the EU’s own Charter of Fundamental Rights. Although the UK proposes not to incorporate the EU Charter in UK law after Brexit, thereby improving the clarity of UK constitutional law, UK and EU persons will still have the right after Brexit to challenge EU27 member states in the EU for breaches of the Charter.

These property rights protect contracts which have an economic value on Brexit. It is difficult to conceive of a financial instrument which will fail to do so. Derivative contracts and any unexercised options contained in them will have a calculable economic value at any given point and will therefore be protected.

Similar protections are provided by the international law doctrine of acquired rights.

Although these “trumping” rights can be overridden in the public interest, it is hard to see any valid basis for that here. After Brexit, UK-based businesses will remain regulated under identical rules to the EU27 by virtue of the Great Repeal Bill. In fact, imposing a regulatory barrier in the EU27 on in-flight contracts would risk serious market disruption, which is against the interest of the EU27 and UK publics. The passing of the Great Repeal Bill is therefore important for avoiding the cliff edge.

Less clearcut will be the position of new transactions entered into after Brexit and which seek to adjust or build on existing contractual arrangements.

However, for wholesale investment businesses there is already a way to protect many such new deals even on a hard Brexit. This can be done by using the EU concept of “reverse solicitation”, whereby EU27 customers can opt out of EU regulatory protections – and into the sole care of the UK’s regime – under arrangements entered into prior to Brexit. This concept is already in use and is being bolstered in EU law next year.

Instead of worrying about a non- existent cliff edge, businesses should make plans to proof existing arrangements against future change, so as to minimise the disruption of a no-deal Brexit. In doing so they can work with the government on a safer, less prescriptive, outcomes-based regulatory environment post-Brexit, which can then be implemented soon after the Repeal Bill comes into effect.

Read more: Government announces Brexit will be an hour earlier (genuinely)

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