8 Sep 2017

Impact of Brexit on cross-border financial services contracts

The market place for the cross-border provision of financial services between the UK and the EU is large and active and reflects over three decades of integration and the implementation of the single rulebook. The UK exit from the EU will change this. A new long-term partnership agreement will need to be negotiated and agreed, and transitional measures defined to help mitigate the impact of a revised market framework for businesses that buy and sell between the EU and the UK.

The regulatory framework and financial passport that has enabled EU-based customers to access the diverse suite of cross-border financial products and services from UK-based banks1 will cease to apply after the UK’s exit from the EU. The same holds true for UK-based customers accessing financial products and services from EU-based banks. What, if anything, will replace these current rights to contract for such financial products and services between the EU and the UK remains unclear.

This has important implications for the many customers that hold contracts for the provision of financial services between the two markets where the duration extends beyond the date in 2019 when the UK is expected to exit the EU. It is estimated that €1.3 trillion of UK-based bank assets are related to the cross-border provision of financial products and services to a variety of customers ranging from governments and individuals to businesses of all sizes.

These services include lending and capital markets, risk management and foreign currency products and services spanning the entirety of the financial services sector, including banking, insurance and investment management. A significant proportion of this back-book of contracts extend beyond the 2019 exit date, providing important funding and risk management for businesses. Many of these services support EU exporting businesses that are key drivers of the EU and UK’s international earnings and strong contributors to economic growth and job creation. European and UK businesses are increasingly concerned about the potential impact on their existing contracts. The UK exit from the EU potentially creates significant uncertainty for these businesses, including with respect to the continuity of the contracts which support their funding, economic activity and risk management. Early action is required to provide the necessary clarity that these contracts will continue following the exit of the UK from the EU.