The Belgian government and financial services regulator are preparing for Brexit. This has recently resulted in the submission to the Belgian Parliament of a draft law providing a framework to take certain contingency measures notably in the financial sector. The FSMA in turn has issued a communication setting out the regime that will apply to UK investment firms post-Brexit and addressing the impact of Brexit on the continuity of contracts entered into by UK investment firms prior to Brexit. Both the draft law and the communication assume a no-deal Brexit.
1. Introduction
On 19 February 2019 a draft law concerning the withdrawal of the United Kingdom from the European Union (the Draft Brexit Law) was submitted to the Belgian Parliament. In the area of financial services, the Draft Brexit Law authorises the Belgian government to adopt specific rules to (i) extend the current rules applicable to third country investment firms and (ii) extend (and clarify) the rules that currently apply to third country regulated markets, MTFs and OTFs when carrying out business in Belgium. More generally, the Draft Brexit Law also authorises the Belgian government to adopt specific rules to ensure the continued validity and enforceability of contracts entered into by UK regulated firms before Brexit. Following the submission of the Draft Brexit Law to the Belgian Parliament, the Belgian Financial Services and Markets Authority (the FSMA) published a communication related to the withdrawal of the United Kingdom (the UK) from the European Union (the EU) on 21 February 2019 (the Brexit Communication)(1).
The Brexit Communication sets out the regime that will apply to UK investment firms post-Brexit and the FSMA’s view on the impact of Brexit on the continuity of contracts entered into between UK investment firms and Belgian clients prior to Brexit. The FSMA invites UK credit institutions and investment firms active in Belgium to immediately inform the FSMA if they intend to pursue the provision of investment services or the performance of investment activities in Belgium post Brexit and, if so, in which form (establishment of a branch or provision of services without establishing a branch) and, as the case may be, to proceed with the relevant notification or application. With respect to the continuity of contracts, the FSMA distinguishes between the mere performance of the contract and “life cycle” events and essentially refers to the Draft Brexit Law for more clarity. The FSMA asks the firms concerned to exercise caution. Both the Draft Brexit Law and the Brexit Communication assume a Brexit without a withdrawal agreement between the EU and the UK and no transitory measures (i.e. a so-called “hard Brexit”).
In this eAlert, we briefly discuss the background to these developments and the key aspects of (i) the Draft Brexit Law and (ii) the Brexit Communication.
2. Background
Both the Draft Brexit Law and the Brexit Communication aim to address the uncertainty created by a ‘hard Brexit’.
The purpose of the Draft Brexit Law is to provide a temporary response to the most significant difficulties that result from a ‘hard Brexit’. The Draft Brexit Law forms part of the measures taken by the Belgian government following the call of the European Council on 13 December 2018 to intensify work on preparedness at all levels for the consequences of the UK’s withdrawal.(2) The European Commission has issued various preparedness communications that introduce a no deal Contingency Action Plan that should be implemented by unilateral measures of the European Union and its Member States in order to mitigate the most significant damage that could be caused by a ‘hard Brexit’(3). These rules must be temporary (in anticipation of a lasting negotiated solution), unilateral (and revocable at any time if necessary) and may not offer the same advantages as EU membership, nor the terms of a transition period as contemplated in the withdrawal agreement.
The purpose of the Brexit Communication is to specify the regime that will apply to UK investment firms following a ‘hard Brexit’ and to examine the impact of a ‘hard Brexit’ on the continuity of contracts.
3. Key Aspects of the Draft Brexit Law
The Draft Brexit Law provides for contingency measures in relation to Brexit. The scope of the Draft Brexit Law is broader than just financial services and includes measures relating to asylum and migration, energy, employment, social affairs and the economy(4). This eAlert is limited to certain key aspects of the proposed contingency measures in relation to financial services.
3.1 Additional rules for third country investment firms
The Belgian government is authorised to adopt additional rules for third country investment firms in order to ensure the protection of investor interests and the proper functioning, integrity and transparency of the financial markets. The preparatory works clarify that the key purpose is to create a level playing field between the regimes applicable to EEA investment firms and to third country investment firms operating in Belgium. Reference is made, by way of example, to the MiFID II transparency requirements(5), which (currently) do not apply to third country investment firms even when they carry out transactions on EEA financial markets.
3.2 Additional rules for third country regulated markets and multilateral and organised trading facilities
The Belgian government is also empowered to enact specific rules to regulate the activities of third country regulated markets, MTFs or OTFs (including, as the case may be, defining the criteria on the basis of which it can be determined whether such activities are conducted in Belgium). Again, the key purpose seems to be the creation of a level playing field between the regimes applicable to EEA (regulated) markets and third country (regulated) markets when conducting activities in Belgium.
It should be noted that any measures based on the authorisations referred to above should in principle apply to all third country investment firms and markets, and not only to UK firms and markets post-Brexit. Therefore, although the relevant measures would be taken in a Brexit-related context, they may also affect the business of firms and markets operating from other non-EEA countries.
3.3 Measures concerning continuity of contracts and legacy books
Finally, the Draft Brexit Law grants special powers to the Belgian government to take special measures in order to ensure the on-going validity and the provision of services agreed under existing contractual relationships with financial service providers who, due to a ‘hard Brexit’, would lose their licence, their registration or any other form of authorisation that is needed to provide the relevant services or conduct the relevant activities in Belgium.
For the purpose of this provision, ‘financial services providers’ are defined as: ‘undertakings or persons of UK or Gibraltar origin, that are active in the financial sector in Belgium and that will have lost their licence or any other form of authorisation in Belgium, in particular those entities or persons that qualify as a credit institution, investment firm, insurance or re-insurance undertaking, payment institution, institution for electronic money, credit provider, undertakings for collective investment (funds), management companies of undertakings for collective investment, insurance and re-insurance intermediaries or credit intermediaries.
The Draft Brexit Law contains some examples of measures that the Belgian government could take, such as granting special authorisation to such financial services providers to allow them to provide services or to conduct activities in Belgium or a declaration of equivalence of a specific third-country regime with that applicable to EEA financial services providers. The preparatory works to the Draft Brexit Law further suggest that the Belgian government could use this authorisation to determine which events in the context of the execution of a contract (eg “life cycle events”), would be considered as the provision of a new service triggering the application of licensing, authorisation or other registration requirements.
4. Key Aspects of the Brexit Communication
The FSMA’s Brexit Communication sets out the regime that will apply to UK investment firms post-Brexit and the FSMA’s view on the impact of a ‘hard Brexit’ on the continuity of contracts entered into between UK investment firms and Belgian clients prior to Brexit.
4.1 Assumptions underlying the Brexit Communication
The Brexit Communication is based on the following assumptions:
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a “hard Brexit”;
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no equivalence decision with respect to the UK on the basis of article 47 of the Markets in Financial Instruments Regulation (MiFIR); and
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no changes in applicable Belgian and European laws.
4.2 Regime applicable to UK investment firms post-Brexit
The FSMA summarises the different options available for UK investment firms to carry out their business in Belgium post-Brexit. These options are based on the law of 25 October 2016 concerning the access to the investment services business and concerning the status and supervision of undertakings for portfolio management and investment advice (the Investment Services Business Law).
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Establishment of a branch in Belgium(6): this requires the prior authorisation by the competent Belgian regulator (i.e. the FSMA or the National Bank of Belgium, as applicable); or
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Cross-border provision of investment services and investment activities without establishment in Belgium(7): this is subject to the following three conditions:
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the UK firm is effectively providing the relevant services or activities in the UK;he UK firm is effectively providing the relevant services or activities in the UK;
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the services and activities are addressed solely at the following types of “qualifying professional investors”:
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MiFID II eligible counterparties;
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“per se” professional clients within the meaning of MiFID II (i.e. not non-professional clients who request to be treated as professional clients); and
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UK nationals habitually resident in Belgium (subject to the additional condition that the investment firm is subject to equivalent supervision in the UK for the relevant investment service or activity (the Condition of Equivalence)); and
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there is a similar possibility for Belgian investment firms to access the UK market (the Condition of Mutuality).
A simple notification, setting out the type(s) of services and activities that the UK investment firms will offer in Belgium and the type(s) of clients that they are targeting, is sufficient. The FSMA can carry out an a posteriori review.
The FSMA further indicates that, for the time being, it would consider that the Condition of Mutuality and the Condition of Equivalence are satisfied with respect to the UK immediately after a ‘hard Brexit’. In relation to the Condition of Mutuality, this is based on the temporary permissions regime for inbound passporting EEA firms that will be implemented in the UK according to an announcement of the UK Financial Conduct Authority.
The FSMA urges UK investment firms currently operating in Belgium to immediately inform the FSMA whether they intend to continue their Belgian operations. If so, the relevant UK investment firms should (i) indicate whether they will do this through a Belgian branch or without Belgian establishment and (ii) proceed to submit their application or notification file to the FSMA or NBB (as applicable). The license applications and notification will only have effect upon the entry into effect of Brexit (assuming no transitory measures allow UK investment firms to continue servicing Belgian clients), so that the FSMA or the NBB will only be able to take such requests and notifications into consideration on such occurrence. UK investment firms that do not – or no longer – meet the applicable conditions, will be deleted from the list of EEA investment firms (in which case they will no longer be authorised to carry out their investment services business in Belgium).
We note that FSMA published a second communication (FSMA_2019_07)(8) on 21 February 2019 that relates to the form that must be completed by non-EEA credit institutions and investment firms that intend to provide cross border investment services or carry out investment activities in Belgium (i.e. without establishment in Belgium). This second communication is only indirectly related to Brexit as its scope covers all third country investment firms and is not limited to investment firms that are based in the UK (post-Brexit). The form to be completed by the relevant firms is attached to the communication.
4.3 Arrangements concerning legacy contracts
To the extent that a UK investment firm currently operating in Belgium is no longer authorised to operate in Belgium after a ‘hard Brexit’ (eg because the clients are non-professional clients and the firm has no authorised branch in Belgium), the question arises as to whether this affects the continuity of existing contracts.
The key question that UK investment firms will need to consider in this respect is whether the continued performance under the contract will trigger the performance of new investment services or activities (which are subject to an authorisation requirement under applicable rules and regulations). The same analysis will need to be made with respect to the so-called “life cycle events”, such as (in the context of OTC derivatives) the novation of the contract, rolling over of an open position, the unwinding of contracts or portfolio compression.
The FSMA does not take any position in this respect in the Brexit Communication. The FSMA only refers to the provision of the Draft Brexit Law allowing the Belgian government to take measures to ensure the continuity of contracts entered into before Brexit. However, at this stage, it is not clear what these measures may be. The FSMA recommends that the relevant firms adopt a prudent approach, taking into account the severe criminal and administrative sanctions that may be imposed if a firm provides investment services or conducts investment activities without the appropriate authorisation.
Footnotes
(4) Interestingly, the measures proposed in relation to the economy include the introduction of authorised underwriters in the Belgian insurance distribution legislation. This is not further addressed in the context of this eAlert. We note that on 20 February 2019 a separate proposal of law was submitted to Parliament relating to the introduction of a regulatory framework for authorised underwriters. Although it is not clear at the time of publication of this eAlert, this may imply that the introduction of the regulatory framework for authorised underwriters will be covered by a separate law and no longer by the more specific legislation concerning Brexit contingency measures.
(5) As laid down in Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012.
(6) Article 13 of the Investment Services Business Act.
(7) Articles 14 to 14/2 of the Investment Services Business Act. The Draft Brexit Law purports to amend article 14 of the Investment Services Business Act to clarify that the regime that allows third country investment firms to provide investment services on a cross-border basis into Belgium (i.e. without establishment of a branch) also applies to the conduct of investment activities on a cross-border basis into Belgium.
