Lost your passport - How a hard Brexit will affect UK financial institutions’ access to the Belgian financial market

The withdrawal agreement negotiated between the UK government and the European Commission ("EC"), i.e. the agreement on the UK’s withdrawal from the EU or also referred to as the "Brexit deal", has been rejected by the UK parliament on 15 January 2019. The deal provided for a transition period until 31 December during which there would be a "status quo" meaning that UK and EEA institutions would continue to enjoy passporting rights. As a Brexit deal becomes more improbable by the day (the absence thereof called the "hard Brexit" or "no-deal Brexit"), the EC has insisted that Member States take appropriate contingency measures to brace for this hard Brexit.

In response to the EC’s position, the Belgian government prepared a legislative draft act on the UK’s withdrawal from the EU ("Draft Act"), which was recently submitted to Parliament and will be discussed in the Parliamentary Commission in the upcoming days. The Draft Act provides for contingency measures should there be a hard Brexit.

Moreover, the Financial Services and Markets Authority (the "FSMA") published on 21 February 2019 a communication on "the provision of investment services and performance of investment activities in Belgium by companies governed by the law of the United Kingdom after entry into force of Brexit" ("FSMA Communication" English / Dutch / French). The FSMA Communication contains local guidance on the effect of a hard Brexit on the investment services industry in Belgium.

1. What is at stake? Losing the EU passport benefit

1.1 The EU passporting mechanism

The EU financial industry is known for its EU passporting rights. The EU passport relies on a set of prudential requirements harmonised under EU law and by the mutual recognition of licences. This means that for matters that have been harmonised, entities established and licenced in an EEA Member State can operate in other EEA Member States that give mutual recognition of their licence, i.e., without having to apply for separate local licences in each Member State where they want to operate. They can freely operate in the host Member State on the basis of the free provision of services or by establishing a branch.

1.2 Third-country regime

If the UK withdraws from the EU without a Brexit deal, UK financial institutions would lose their EU passport and be subject to third-country rules. UK financial institutions would thus lose their right to carry on business in the EEA under both the free provision of services in the EU and the right to establish a branch in the EEA.

There are no passporting rights for third-countries. Where provided for in the piecemeal EU legislation, third-country financial institutions can seek equivalence treatment. The EU equivalence provisions are narrowly defined in each provision, however, and they do not stipulate the general freedom that would be granted to them to operate in a Member State and the mutual recognition principle. They are tailored to the needs of each specific act, and their meaning varies from one legal text to another. In the absence of any generic EU framework for third countries and EU contingency measures, and without prejudice to any EU equivalence provisions, UK financial institutions will have to check local third-country provisions that can be found in different parts of Belgian legislation.

Continuing to carry on business in Belgium without proper authorisation is not an option for UK financial institutions because they can be subject to criminal sanctions.

Below is a non-exhaustive overview of the licencing possibilities for certain third-country financial institutions in Belgium should there be no Brexit deal. Note that the overview below is without prejudice to the right of UK financial institutions to establish and authorise "subsidiaries" incorporated under Belgian law and obtain a licence for them in Belgium or establish and operate through subsidiaries incorporated and licenced under the law of another EEA Member State.

a. Banking business

UK credit institutions wanting to continue to provide banking services in Belgium can apply with the National Bank of Belgium ("NBB") in accordance with the Belgian Banking Act to obtain a local branch licence for the provision of banking services here. The licencing requirements are similar to and as burdensome as those that apply to a locally licenced bank.

b. Payment and e-money services

UK payment and e-money institutions wanting to continue to provide payment service and to issue e-money can apply for a local branch licence with the NBB in accordance with the Belgian Payment Services and E-money Institution Act. Foreign credit institutions can also provide such services in Belgium as long as they have obtained the local licence as a branch of a third-country credit institution and if they are authorised to provide such services in their home country. The latter condition should be presumed to be fulfilled since UK credit institutions, by virtue of their current (EEA) licence, may provide such services.

c. Investment services

Investment firms established in a third country such as the UK can operate in Belgium:

1. currently, through the freedom to provide services in the EU according to the notification and registration procedure regime available pursuant to Article 14 of Belgian Investment Firm Act. Under this regime, the investment firm will only be permitted under certain conditions to target certain investors such as “professional investors” (i.e., “eligible counterparties” and “professional clients” as defined in the MiFID legislation) and “same nationality investors”. Regarding the main conditions that must be fulfilled, the FSMA considers that the "reciprocity condition" is already fulfilled in view of the UK government’s announcement about the introduction of a temporary permissions system for inbound passporting EEA firms, which was published by the UK’s FCA on its website; and that the "equivalence of supervision" is also fulfilled already as long as the current investment firms supervision system under UK law is maintained. To operate under this system, prior notification should be made with the FSMA through the standard form, which the FSMA has issued on 21 February 2019.
2. in the future, through the (EU passport under the) freedom to provide services under Articles 46 to 49 MiFIR which is open to third countries after they are registered with the ESMA. Under this system, the investment firm will only be permitted to target “professional investors”. So far, no “equivalence decision” has been taken by the European Commission, which is one of the prerequisites for benefitting from this system. Once this system is adopted, the local regime as described above will lapse; or
3. after having obtained a (national) licence for its branch in Belgium, and this with or without tied agents. Although there is no EU passport for third-country branches, note that the branch conditions have been harmonised, however. The branch procedure in several Member States should in principle not differ. In Belgium, applying for a licence to operate a branch will have to be done with the FSMA (for investment firms of the type giving investment advice or an asset management company) or the NBB (for investment firms of the type that are stockbroking companies).

Further details can be found in the FSMA Communication.

d. Fund and fund management

With respect to the marketing of alternative investment funds ("AIF"), there is a local Article 42 AIFMD procedure that allows private placement of units in an AIF by a third-country AIF manager ("AIFM") in Belgium. The FSMA has issued a standard Article 42 AIFMD form that must be completed and submitted by any third-country managers that wants to carry out Belgian private placement. Regarding a UK AIFM’s management and public marketing of the AIF, they will be subject to the local licencing provisions in accordance with the Belgian AIFM Act.

Undertakings for Collective Investment in Transferable Securities ("UCITS") and UCITS management companies ("UCITS Manco") are, by definition, EU/EEA-domiciled funds. This means that post-Brexit, the UCITS schemes with an establishment in the UK will no longer qualify as UCITS schemes under the Belgian UCITS Act. Without prejudice to any specific measures, the pre-Brexit-established UK UCITS and UCITS Manco will be considered, from then on—post-Brexit—in Belgium as third-country AIF and AIFM and will therefore fall under the scope of application of the AIFM Act.

e. Insurance and reinsurance undertakings

Insurance undertaking established in a third country can operate in Belgium only after having obtained a local Belgian licence from the NBB for its branch in Belgium, in accordance with the Insurance and Reinsurance Supervision Act.

How a reinsurance undertaking established in a third country can operate in Belgium depends on whether the European Commission adopts an Article 172 Solvency II-equivalence decision with respect to the solvency system in that third country:

1. a reinsurance undertaking established in a third country for which there is an Article 172 Solvency II-equivalence decision can operate in Belgium through the free provision of services principle or after having obtained a licence for its branch in Belgium. The (passporting) provisions for reinsurance undertaking licenced in another EEA Member State (other than Belgium) apply then mutatis mutandis.
2. a reinsurance undertaking established in a third country for which there is no such decision available for the relevant third (home state) country can operate in Belgium only after having obtained a licence. In this case, the (more stringent) provisions for third-country insurance undertakings (branch only) apply. In the absence of such equivalence decision for the UK, this will be the scenario for UK reinsurers post-Brexit.

Moreover, the Draft Act also introduces a new category of (re)insurance intermediaries, the "(re)insurance underwriters" (“gevolmachtigde onderschrijver” / “souscripteur mandate”). The Belgian legislature and the FSMA consider this type of intermediaries worthy of being more strictly regulated in Belgium post-Brexit. An underwriter is defined as “an insurance intermediary who, as mandatary of one or more insurance undertakings, has the power to accept risk coverage on behalf and in the name of those insurance undertakings and to close and manage insurance agreements”.

2. Belgian contingency measures in case of a hard Brexit

The Belgian legislature wants to grant the Belgian Government powers to take contingency measures to guarantee contractual continuity in agreements affected by a hard Brexit.

The Belgian Draft act  does not define the impact of UK financial institutions’ loss of the passport on agreements entered into prior to the entry into force of Brexit, i.e., it does not state that these institutions will no longer be authorised to pursue their activity in Belgium post-Brexit. The continuity of individual agreements concluded with UK financial institutions prior to Brexit could therefore be threatened during their performance or if a so-called life-cycle event takes place.

This could cause serious harm to clients, especially if it concerns agreements that entail an ongoing provision of financial services provided by UK financial institutions. These include contracts to provide investment advice or portfolio management services. Another issue relates to OTC (over-the-counter) derivative contracts with UK parties (the consequences of the loss of the passport on the performance of rights and obligations arising directly from the derivative contract and on the occurrence of certain events during the life cycle of the contract (“life-cycle events”)).

The Draft Act therefore empowers the Belgian government to take the necessary measures to ensure the performance of the aforementioned agreements concluded with UK financial institutions prior to Brexit.

The Belgian government could, for example, (the list in the Draft Act is non-exhaustive):

1. grant the necessary permissions to the UK financial institutions concerned; or
2. stipulate a conditional (and temporary) assimilation to the EU passport system;
3. specify which life-cycle events constitute the provision of a new investment service or performance of a new investment activity.

The Draft Act also authorises the Belgian Government to introduce additional obligations for third-country investment firms, upon advice from the FSMA, if necessary for investor protection or to uphold the functioning, the integrity or transparency of the financial markets. The Draft Act notably mentions possible additional rules regarding data retention or transaction reporting for investment firms executing orders.
The Draft Act further authorises the Belgian Government to enact specific rules, upon advice from the FSMA, regarding a regulated market, OTF or MTF exploitation in Belgium. The Belgian government could, amongst other things, define the criteria for determining if these players effectively operate in Belgium. 
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In conclusion, the current Brexit negotiations give a lot of uncertainty about the transition system for UK financial institutions willing to carry on their business in Belgium. With no such certainty at this stage of the Brexit momentum, UK financial institutions willing to carry on their business in Belgium should assess the possibility of applying for local licences, the rules of which can be found in the piecemeal Belgian legislation and apply for such licences as soon as possible. The FSMA, the Belgian legislature, and as well as the Belgian Government are in parallel trying to cope with the local challenges of the potential impact that a hard Brexit could have on the loss of the passporting rights of UK financial institutions carrying on business in Belgium.

This article was co-written by Sarah De Dijn in her capacity as an associate at Stibbe.