18.03.2019

Withdrawal agreement: Business as usual or national emergency solutions: Which law will be valid from April?

Fourteen days before the expiry of the regular two-year period during which – despite the UK's communication of 29 March 2017 to the European Council that the UK wishes to leave the European Union – European law continues to apply, there are two matters able to find a majority in the UK Parliament's House of Commons: (i) No Brexit without an exit agreement and (ii) rejection of the draft exit agreement negotiated between the UK government and the EU.

What does this mean for banks and financial services providers? With regard to legal transactions between the European Union and the United Kingdom, one of three sets of rules will apply from April 2019 until further notice:

  • If a withdrawal agreement is still concluded, the transitional rules of the withdrawal agreement will apply (see I. below);
  • If an extension decision is taken in accordance with Art. 50 (3) TEU, the current rules will continue to apply until further notice;
  • If neither a withdrawal agreement nor an extension decision is reached, adopted provisional national transitional rules (III.) will apply.

 

I. Withdrawal agreement

In two votes in the House of Commons, the draft withdrawal agreement negotiated between the European negotiators and the UK Government was not able to obtain a majority. Theresa May wants to have a third vote on the draft agreement by Wednesday at the latest. The regulations concerning the border between Northern and Southern Ireland are at the centre of the dispute. Irrespective of when a withdrawal agreement will be concluded, Art. 126 et seq. of the a priori published version of the draft withdrawal agreement will probably enter into force without modifications:

For a transitional period ending on 31/12/2020 (Art. 126 of the draft) or, in the case of an extension (Art. 126 of the draft), no later than on 31/12/2022, EU law would apply, including the agreements concluded between Member States in their capacity as Member States of the European Union both for the United Kingdom and in the United Kingdom. This means that the United Kingdom would continue to be treated as a Member State and, accordingly, the national regulations on the recognition of licences to provide services subject to authorisation (passporting rules) would continue to apply.

 

II. Postponement of Brexit

The postponement of Brexit is considered likely. According to Art. 50 (3) TEU, this requires the consent of the United Kingdom's Parliament and a unanimous decision of the European Heads of Government (the European Council) which could be taken at their meeting scheduled for Thursday and Friday.

In case of a postponed Brexit, everything will remain the same for the duration of the postponement period.

 

III. Minimum of continuity through national transitional rules

If a decision according to Art. 50(3) TEU is not made for lack of support by the UK parliament or due to a veto of a member of the European Council, or if no withdrawal agreement is reached until the postponed Brexit date according to Art. 50 (3) TEU, this will mean a so-called "hard Brexit". In this case, a bill by the Federal Government based on two draft bills from the Federal Ministry of Finance and adopted by the Bundestag on 22/02/2019 and approved by the Bundesrat last Friday, 15/03/2019, will provide transitional solutions. France, Spain, Italy, the Netherlands and Ireland have also prepared transitional arrangements.

The "Act on Taxation and Other Provisions Accompanying the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union" ("Accompanying Brexit Tax Act - Brexit-StBG") passed in Germany is to enter into force next Friday, March 29, 2019, after having been signed by the President of the Federal Republic of Germany. It includes the following:

Passporting regulations – Section 53b (12) KWG [Banking Act] / Section 39 (8) ZAG [Payment Services Supervision Act]:

Authorisation by BaFin to extend the application of the provisions on European passporting as a whole or in part for up to 21 months for companies domiciled in the United Kingdom which, at the time of withdrawal, are conducting banking business, offering financial services or acting as payment or e-money institutions in Germany using the European passport through a branch or by way of a cross-border provision of services (in the case of a Brexit without a withdrawal agreement from the end of this month until 31/12/2020), if this serves to avoid disadvantages for the functioning or stability of the financial markets or payment transaction markets and if the transactions or services concerned are closely related to contracts in place at the time of withdrawal.

The rules concerning payment and electronic money institutions were only introduced in the context of the discussion of the government draft in the Bundestag and will allow payment and electronic money institutions domiciled in the United Kingdom to apply for a licence under the laws of a Member State, if they have not already done so.

Regulations on securities law – Section 102 WpHG [Securities Trading Act]

Authorisation by BaFin to suspend for up to 21 months the licence requirement for third-country domiciled operators of financial instrument markets for operators domiciled in the United Kingdom

Passporting regulations for insurances - Section 66a VAG [Act on the supervision of Insurance Undertakings]

Authorisation by BaFin to declare applicable, to insurance undertakings established in the United Kingdom, the European passporting regulations for the purpose of handling insurance contracts concluded prior to Brexit to protect policy holders.

Regulations on labour law - Section 25a (5a-c) KWG

The Brexit-StBG [Accompanying Brexit Tax Act] draft also provides for reduced protection against termination for risk carriers of major institutions whose annual fixed remuneration exceeds three times the contribution assessment ceiling of the general pension insurance: In deviation from Section 9 KSchG [Employment Protection Act], an employer may file an application with the court for termination of the employment relationship in return for an adequate severance payment if an action for dismissal protection was successful in the first instance, without having to substantiate it.

 

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