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Brexit: three months and counting

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Following Brexit on 1 February 2020, the end of the transition period on 31 December 2020 is rapidly approaching. At this stage it is still uncertain if an agreement between the EU and the UK will be reached on the period thereafter so the risk of a hard or no deal Brexit is increasing and mitigating action may be advisable, especially by investment firms who may not be able to rely on an exemption anymore.

Transition period

The Withdrawal Agreement agreed upon between the EU and the UK provided for a transition period that will end on 31 December 2020. At present, only three months of this period are left. However, as there is still no agreement between the EU and the UK on the period following the transition period, the risk of a hard Brexit remains and increases as time lapses.

In case of a hard Brexit, certain EU and Dutch rules and regulations will apply in order to assist UK financial institutions to continue to do business in the Netherlands. Apart from that, certain EU rules and regulations provide for mitigating effects.

Dutch statutory regimes for investment firms and AIFMs

Earlier, two particular Dutch regimes were suggested to mitigate the effects a hard Brexit:

  • UK investment firms would be able to (temporarily) continue to actively service Dutch professional clients on the basis of a proposed amendment of the existing exemption for certain foreign investment firms, thereby allowing UK investment firms to temporarily continue to provide services in the Netherlands. This regime would be similar to the temporary permissions regime in the UK and was expected to last for (at least) two years.
  • UK AIFMs may (temporarily) continue to market their AIFs to qualified investors in the Netherlands on the basis of the existing Dutch national private placement regime under the AIFMD. The AIFMD provided for an end to this regime (originally already in 2018) so also this regime is likely to be of a temporary nature.

However, recently the Minister of Foreign Affairs and the AFM have indicated that the temporary exemption for UK investment firms will not be entering into force upon a hard Brexit. The main reason apparantely being that due to the esarlier postponement of Brexit and the transitition period now ending on 31 December 2020, ample time has been available to UK investment firms and their Dutch client to take the necessary action, thereby taking away the necessity for this temporary exemption.

Private placement to qualified investors will remain possible for UK AIFMs upon a hard Brexit. This requires a registration with the Dutch regulator AFM which is free of charge. In addition, certain ongoing requirements must be met by the UK AIFMs s registered.

Action required?

Now that the end of the transition period is rapdily approaching and there is still no agreement on a soft Brexit, it is advisable to take any further mitigation action required. For UK AIFMs this can be a simple registration with the AFM. UK investment firms actively servicing Dutch clients will now have to consider how they may be able to continue their services. This may require a license in the EU or altogether ceasing actively servicing Dutch clients.

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Brexit: it is finally there (but it is still unclear)

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At 00:00 hrs on 1 February 2020, Brexit is finally a reality and the United Kingdom is no longer part of the European Union. However, now that the UK Parliament and the EU Parliament ratified the Withdrawal Agreement on 23 and 29 January 2020, there will be no hard (or no deal) Brexit, at least not for the moment.

Transition period

The Withdrawal Agreement provides for a transition period that will end on 31 December 2020. On the basis of the Withdrawal Agreement, basically all EU law will continue to apply to and in the UK during the transition period. This means that until 31 December 2020, little will change in comparison with the period prior to Brexit. One may say that, as long as no permanent deal on transition has been reached, a soft Brexit applies. During 2020 UK financial institutions will continue to have access to the EU as before. The same goes for EU financial institutions and access to the UK.

As a result, the statutory arrangements made by EU and national legislators and regulators with a view to a hard Brexit, do not need to be enacted in 2020. These arrangements may however still be necessary if no agreement is reached between the UK and the EU on their future relationship. In other words, a hard Brexit is still possible, in which case the statutory arrangements may be enacted after all. Whether this will be the case will become clear in the course of 2020 or even thereafter, should the transition period be extended.

Dutch statutory arrangements for investment firms and AIFMs

As indicated in previous Brexit updates, arrangements have already been made in the Netherlands, or are already in place, to accommodate investment firms and AIFMs from the UK when dealing with professional clients or qualified investors within the Netherlands. This is primarily done with a view to protecting Dutch institutional investors, enabling them to continue to deal with UK investment firms and AIFMs. As a result of the transition period, the new Dutch exemption for UK investment firms that was announced earlier will not be enacted for the moment due to the lack of a hard Brexit.

Action required?

Even though the existing EU regime will continue to apply to and in the UK in 2020, the most important conclusion to be drawn is that for the moment a soft Brexit is now truly a fact, but for the moment only for 2020. This means that parties that have postponed their mitigating actions must still take action to address the consequences of Brexit. While the negotiations between the UK and the EU may still result in an agreement on continued access by UK financial institutions to the EU, success should not be taken for granted. Should such negotiatons fail and in the end result in a hard Brexit, measures will have to be taken to secure continued access to (clients in) the EU.

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Brexit update

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With the postponed Brexit date of 31 October 2019 rapidly approaching, this is a short update of relevant Dutch rules and regulations for the financial services industry to mitigate the negative consequences of a hard Brexit. This update does not cover EU-wide arrangements such as those on clearing and trading at regulated markets.

Coming to the Netherlands

In September the Netherlands Instute of International Relations “Clingendael” has published a database of companies that have moved or are in the process of moving, (part of) their business to the Netherlands with a view to a Brexit. Where the Netherlands Foreign Investment Agency mentioned earlier that in August 2019 some 98 companies had opted for the Netherlands, the “Clingendael” institute now counts 56 companies moving 32 of which are financial sector companies. This group consists of trading venues, boutique trading firms and more traditional financials. No doubt depending on further Brexit developments more financials may follow. If they do, they may however benefit from the following regulations and may avoid moving for the purpose of market access.

UK investment firms

Investment firms domiciled in the UK providing services to professional clients in the Netherlands or dealing on own account in the Netherlands, may benefit from a new exemption from the Dutch licensing requirements for investment firms under MiFID II. Similar to the existing exemption for investment firms domiciled in the U.S., Switzerland and Australia, also UK investment firms may benefit from this exemption but only in case of a hard Brexit. In case of a deal on Brexit, this exemption will not enter into force. This exemption may be of a temporary nature only.

To benefit from this exemption the investment firm involved may only provide investment services to professional clients (such as Dutch institutional investors), must be subject to supervision by a competent supervisor (the FCA), and must register itself with the Netherlands Authority for the Financial Markets (AFM). This registration is of an administrative nature and can already be made prior to and conditional upon a hard Brexit. A registration fee of € 4,400 will be charged by the AFM in case registration will actually take place upon a hard Brexit.

A limited number of ongoing requirements applicable to Dutch licensed investment firms will apply upon registration. These requirements should not be burdensome for UK investment firms nowadays meeting the MiFID II requirements.

UK AIFMs

AIFMs domiciled in the UK may benefit from the existing Dutch private placement regime under AIFMD in case of a hard Brexit. In order to do so, marketing must be limited to qualified investors (such as Dutch institutional investors), the competent regulator (the FCA) has to confirm that it will be able to meet the obligations under the cooperation agreement with the AFM as recently agreed upon, and registration with the AFM has to take place by the AIFM. This registration is of an administrative nature and is free of charge.

Further to AIFMD, a limited number of ongoing requirements applicable to AIFMs will apply upon registration. These requirements should not be burdensome for UK AIFMs nowadays meeting the AIFMD requirements.

Other financial services sectors

Other than the EU-wide arrangements to mitigate the negative effects of a hard Brexit, there are no particular Dutch mitigation measures for other financial services sectors. As a result, other types of UK financial institutions will still have to take into account what part of their business in the Netherlands may be impacted by a hard Brexit. As a positive note it can be mentioned that in the meantime the Dutch regulators DNB and AFM have ample experience in handling authorization requests by UK financial institutions to set up a regulated Dutch business. As a result, while authorization remains to be a timeconsuming and expensive process, the benefit of an application at this stage is a smoother process than the initial applicants have gone through.