In the previous articles in this series we focussed on the practical implications of Brexit for lenders and borrowers, and their finance agreements. In this article we consider the position of EU law on UK finance arrangements going forward.
The big picture
EU regulations, directives and judgements: from a practical perspective, EU regulations will no longer have direct effect in UK, so UK probably will need to pass appropriate UK SIs to implement if they are to be retained, unless there is a blanket statutory uploading by Parliament. There are reports that hundreds of statutory instruments (secondary legislation) are currently being considered by parliamentary committees and, according to Andrea Leadsom in an interview on 12 February 2019, the most important for Brexit Day will be in place by then. EU directives have always required UK statutory provision for implementation so those will remain unless and until repealed by UK government, but any new directives would not apply and it would be up to UK government whether to pass similar laws. UK Supreme Court will no longer be bound by decisions of ECJ (CJEU) and any precedents can be disregarded by it from 29 March. Other courts probably are still bound, but that is not absolutely cast in stone.
Choice of law/governing law – It is possible for lender and borrower to agree a contractual change to the governing law for their agreement, or for the option to do so. Look at how that is to be achieved and what happens if the parties don’t agree? Those loan agreements that are already stated to be governed by English law will continue to be, and the EU courts will be required under Rome I Regulations to give effect to that choice of law – this would be the case whether it is another member state’s or a third party country’s law.
Enforceability of UK judgements in EU and EU judgements in UK – currently this is guaranteed because we are in EU. Reliance on other treaties for recognition and enforcement post-Brexit will not be automatic. In the meantime, the UK deposited on 28 December 2018 its Instrument of Accession to the Hague Convention.
Passporting: If there is a negotiated deal between UK and the EU, then there is likely to be a negotiated transition period and agreement on how business can continue to be conducted in that period. For lending/borrowing, that is likely to include continued “passporting rights” under which it is effectively business as usual during the transition period at least. UK has put in place temporary passporting rights which will allow lenders from any existing EU country (the EU27 as it is known) to operate in UK as they do at present, whether there is a deal or not. EU27 has not (yet) made reciprocal provisions. Italy is currently looking at transition provisions; Poland has said it will not introduce transition provisions for UK entities in the case of a no deal Brexit: in the case of no deal Brexit, UK entities operating on the Polish financial market will be treated as third-country entities. Germany (on a different topic) has introduced the German Brexit Transition Act which, among other things, allows banks in Germany to terminate the employment of their high paid (risk taking) employees without following the usual strict requirements of German labour law, and without providing reasons. It will apply to notice served after the effective date of 29 November 2019. The act is still under discussion within the German parliament. This may affect employees of German banks currently in UK, as well as employees of UK-based banks who set up in Germany.
Some key points to note
- This article provides just a snapshot of some of the issues that are likely to cause concern. It is not an exhaustive list;
- Please take advice from your legal team as even minor amendments to your arrangements can have wider implications than appear at first;
- Regardless of whether we exit in March, some time after or not at all, it was clear before the referendum in June 2016 that UK was pushing for changes in its relationship with EU – there is no going back to how it was before;
- The government has the power to implement and make changes to in-flight financial services legislation for two years after the UK withdraws from the EU in a no-deal scenario.