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Brexit: three months and counting

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.

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

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.