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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.

Brexit update

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.

Brexit – Continued services by UK investment firms and investment funds following a hard Brexit

Continued services by UK investment firms and investment funds following a hard Brexit

Even though the original Brexit date of 29 March 2019 will probably be postponed for a short term, there is at present still no certainty that a no deal Brexit or hard Brexit will be avoided. As a result, companies domiciled in the United Kingdom that presently make use of the freedom of services principle within the EU on the basis of a European passport, are still at risk of not being able to continue their services into the EU following Brexit. The Dutch legislator has however taken various steps to mitigate the results of Brexit and notably a hard Brexit. Apart from that, the Dutch legal regime provides for some options for continued services. Two regulations are relevant for investment firms and investment funds domiciled in the United Kingdom.

 

UK investment firms

Investment firms domiciled in the United Kingdom providing services to professionals clients in the Netherlands or dealing on own account in the Netherlands, may benefit from a proposed exemption from the Dutch licensing requirements for investment firms further to MiFID II. It has been proposed that the existing exemption for investment firms domiciled in the U.S., Switzerland and Australia will be amended and will also apply to investment firms domiciled in the United Kingdom following a hard Brexit.

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 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 but only in case registration will actually take place upon a hard Brexit. As a result, no fees will be due if registration has already been applied for prior to Brexit but a hard Brexit will be avoided after all. In that case the registration will not be processed by the AFM.

A limited number of ongoing requirements applicable to Dutch licensed investment firms will apply upon registration. These requirements are generally not considered as burdensome.

 

UK investment funds

Alternative investment funds managers domiciled in the United Kingdom that are presently marketing their alternative investment funds in the Netherlands or are managing Dutch alternative investment funds, may benefit from the Dutch private placement regime under AIFMD in case of a hard Brexit and by doing so, continue their present activities in the Netherlands.

To benefit from this regime 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. This registration is of an administrative nature and is free of charge.

Further to AIFMD a limited number of ongoing requirements applicable to alternative investment funds managers will apply upon registration.