No deal Brexit could affect financial services’ regulation to trade cross-border

Companies in the financial services sector could lose their regulatory permissions to conduct cross-border business in the even of a no deal Brexit, with businesses setting up European entities to mitigate this risk

According to the government’s recent paper, setting out the UK’s current state of readiness for a no deal exit, the European Commission has implied that third country access for financial services will not be in place for the UK across EU legislation in a no deal situation.

The government says that it has taken action to minimise disruption for UK businesses by introducing temporary regimes for EEA firms operating in the UK and several member states are introducing ‘no deal’ legislation to mitigate risks of disruption to certain financial services provided by UK-based firms.

In addition to this, financial services businesses have set up new European entities as part of their no-deal planning.

In its financial stability report, published in November 2018, the Financial Policy Committee stated that the UK banking system is strong enough to continue to serve UK households and businesses even in the event of a disorderly exit. It also said that most risks of disruption to the financial services that EU firms provide to UK households and businesses in the event of a no deal exit have been addressed, including through legislation. However, the absence of action by EU authorities to mitigate risks in some areas of financial services, there could be some disruption in a no deal scenario.

The government’s latest paper also covered residency issues for UK nationals living abroad. The paper states: ’For UK nationals living in another EU Member State, citizens with less than five years’ residency would be subject to the rules of the member state in which they are living, including their immigration rules.’

Although most member states have announced unilateral arrangements for resident UK nationals, the offers do vary. The government is now encouraging member states to reciprocate the offer that the UK has made to resident EU nationals, but in the absence of an arrangement of this sort UK nationals would see changes ranging from the administrative to more profound effects, such as the potential need to arrange for healthcare cover.

In regard to VAT and customs rules, in a no deal scenario, both the UK and EU would need to apply customs and excise rules and VAT to goods moving between the UK and EU, as they are currently applied to goods traded in the rest of the world. 

This means that around 240,000 UK businesses that currently only trade with the EU would need to interact with customs processes for the first time, should they continue to trade with the EU. HMRC has estimated that the administrative burden on businesses from customs declarations alone, on current (2016) UK-EU trade in goods could be around £13bn each year (not accounting for any behavioural change).

Notice: Implications for business and trade of a no deal exit on 29 March 2019 is here. 

Report by Pat Sweet

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