Documents considered by the Committee on 9 January 2019 Contents

3Prudential requirements for investment firms

Committee’s assessment

Politically important

Committee’s decision

Not cleared from scrutiny, but scrutiny waiver granted; further information requested; drawn to the attention of the Treasury Committee

Document details

(a) Proposal for a Regulation on prudential requirements for investment firms; (b) Proposal for a Directive on the prudential supervision of investment firms

Legal base

(a) Article 114 TFEU; ordinary legislative procedure; QMV; (b) Article 53 TFEU; ordinary legislative procedure; QMV

Department

Treasury

Document Numbers

(a) (39397), 16017/17 + ADD 1, COM(17) 790; (b) (39400), 16011/17 + ADD 1, COM(17) 791

Summary and Committee’s conclusions

3.1At present, there is no EU-wide specific prudential regulation covering the investment industry. Instead, that sector is covered by the prudential rules drafted for the banking industry under the Capital Requirements Directive and Regulation. Following a review, the European Commission in December 2017 tabled legislative proposals—a Regulation and a Directive—for a new, calibrated prudential regime for investment firms (referred to as the “investment firm review”).

3.2Based on an Explanatory Memorandum submitted by the Treasury in early 2018, we described the substance and potential implications of the proposal in more detail in our initial Report of 28 February 2018. In summary, the Commission has proposed to create a new classification system for investment firms, ranging from Class 1 (systemically-important investment banks) to Class 3 (the smallest investment firms).49 For Class 2 and Class 3 firms, the draft legislation would create new, tailored prudential and organisational requirements, whereas Class 1 firms would remain subject to the Capital Requirements Directive for banks (as they are at present). For them, the major change would be that supervisory responsibility within the Eurozone would shift from the national regulator of their home Member State to the European Central Bank’s Single Supervisory Mechanism (SSM). (This is to address suspicions that UK investment firms wishing to retain a foothold in the EU market might otherwise ‘shop around’ for the most light-touch national prudential approach within the Eurozone after Brexit).50

3.3In addition, the Commission proposals would also modify the way in which non-EU firms could access the EU market for investment services. This, again, is driven to a large extent by the UK’s withdrawal from the European Union. The Markets in Financial Instruments Regulation (MiFIR) currently allows the Commission, with the support of the Member States, to declare the regulatory regime of a ‘third country’ equivalent to the EU’s.51 If such a determination is made, firms from that country can provide investment services to EU-based professional and institutional clients on a cross-border basis (i.e. without the need for a legal presence in the EU itself).

3.4Amid concerns that a significant volume of such services could be provided from outside the EU’s direct jurisdiction if the UK were to obtain equivalence after Brexit, the draft legislation would attach more stringent conditions to the equivalence process by requiring a “detailed and granular process for the assessment” that also takes into account the third country’s “supervisory convergence”.52 The clear purpose is to give the Commission more leeway to make any UK request for equivalence conditional on a very close alignment with the EU’s regulatory regime for investment firm after Brexit.53 The Commission also wants mandatory submission of information on the activities of branches54 of non-EU investment firms operating in the EU.

3.5The Treasury’s initial Explanatory Memorandum on the proposals supported the new classification system and linked prudential and organisational requirements. However, with respect to the modifications to the equivalence process, the Economic Secretary told us in January last year the UK wanted to “agree stable, reciprocal arrangements” for trade in financial services. Indeed, for several months after that the Chancellor of the Exchequer was still insisting that equivalence should categorically not form the basis for the UK’s future trading relationship with the EU in financial services.55 Since then, this position has been abandoned and the Political Declaration accompanying the draft Withdrawal Agreement commits the EU to “start assessing equivalence […] as soon as possible after the United Kingdom’s withdrawal” and to keep its “respective equivalence frameworks….. under review”. The EU has made no specific commitments as to what those ‘reviews’ should entail or lead to, and has only consented to an ambition—rather than an obligation—to conclude its assessments of the UK’s regulatory approach by June 2020.56

3.6We received a further update from the Economic Secretary on the state of play in the negotiations in December 2018. This indicated that the Member States had arrived at a common position with respect to the regulation of smaller (Class 2 and Class 3) investment firms, but that the treatment of the systemically-important ones (Class 1) was still being negotiated. Similarly, discussions were on-going about the ‘equivalence’ provisions under MiFIR, and those these should be amended in light of the UK’s withdrawal from the EU, with the remaining Member States focussing on the powers of the European Securities & Markets Authority (ESMA) to supervise and regulate the activities of non-EU firms on the EU market. The Minister also informed us that the European Parliament had taken a very restrictive approach to ‘third country’ access, excluding certain investment activities from the scope of any equivalence decision altogether.57

3.7According to the Economic Secretary, the Member States could reach a compromise on their joint position on the investment firm review—a so-called “general approach”—in early 2019. This would then form the basis for a final set of negotiations with the European Parliament on the ultimate substance of the prudential legislation for the investment industry, including the equivalence provisions. The Minister requested we grant him a scrutiny waiver to enable the Treasury to support a general approach if the files were tabled for formal consideration at a meeting of the Council, provided the Government considers the remaining issues in the discussions among the Member States are resolved to the UK’s satisfaction.

3.8If the investment firm review is agreed between the European Parliament and the Council before the European elections in May 2019, it is likely the new legislation would take effect in late 2020 or early 2021. We have set out the potential implications of that for the UK and its investment industry in our conclusions below.

Our conclusions

3.9We thank the Minister for his timely update on the state of play in the negotiations on the EU’s investment firm review. We note that Member States are still discussing crucial areas of the proposals among themselves—including the treatment of Class 1 firms and the matter of third country ‘equivalence’—and that no firm timetable exists yet for the final set of negotiations between the European Parliament and the Member States on the definitive substance of the new legislation.

3.10The UK is home to Europe’s largest investment services industry, with activities in the European Union and worldwide. As such, the way in which the EU regulates this sector is of direct relevance, even taking into account the UK’s withdrawal from the bloc. Therefore, whatever the eventual outcome of the Brexit process, it is clear that the new prudential framework for investment firms—once approved by the Council and the European Parliament—is likely to have a direct impact on firms in the UK for a number of reasons.

3.11First, the draft Withdrawal Agreement provides for a post-Brexit transitional period during which EU law, including new legislation, would continue to apply in the UK as if it were still a Member State. Although it has an initial end date of 31 December 2020, it could be extended—at the UK’s request, and with the EU’s consent—for another two years.

3.12The investment firm review could be agreed between the Member States and the European Parliament before the EU elections in May 2019. If so, the new prudential framework would take effect 18 months later, in late 2020 or early 2021. Should the transition be extended, it is therefore possible that the new legislation would apply directly in the UK. Whether the Government has a vote over the final substance of the new rules will depend on whether formal adoption takes place before it ceases to be a Member State on 29 March 2019. In any event, Qualified Majority voting rules mean the Government cannot veto the legislation even before that date if a sufficient number of other Member States are in favour of a deal struck with the Parliament.

3.13Secondly, the investment firm review will amend the mechanism for ‘equivalence’ under which UK investment firms could seek to access the EU market after withdrawal from the Single Market. The Political Declaration accompanying the Withdrawal Agreement makes specific reference to the need to begin equivalence assessments as soon as possible after 29 March 2019, and that will include the extent to which the UK’s post-Brexit regulatory approach to investment services remains aligned with the EU’s under these pending proposals. We note in this respect that negotiations among the Member States on the exact conditions relating to the granting, monitoring and withdrawal of equivalence for investment services are still on-going, and that the Parliament has proposed certain restrictions on the types of services covered (which the Government opposes).

3.14The technical conditions for equivalence, whether or not amended by the investment firm review, are nevertheless only part of the picture. The European Commission’s recent decision to grant Switzerland only a six-month extension to its equivalence for stock exchanges under EU law to pressure it to accept a broader treaty on the bilateral EU-Swiss relationship is instructive.58 It demonstrates the possibility, if not likelihood, that discussions between the UK and the EU on equivalence in financial services could become politicised by the wider negotiations on a future economic and security partnership. It cannot be ruled out that the EU would, for example, insist on a trade-off between equivalence for the UK investment industry and EU fishermen’s access to British waters.

3.15Lastly, the investment firm review proposals are also relevant under the recent Financial Services (Implementation of Legislation) Bill. This would give the Government the power to implement a limited number of pending EU proposals on financial services—including the prudential regime for the investment industry—into UK law by Statutory Instrument in the event of a ‘no deal’ (that is, even if it is no longer under an EU legal obligation to apply this legislation). This power would exist for two years after ‘exit day’ (29 March 2019).59

3.16The powers under the Financial Services Bill apply irrespective of whether the EU legislation is adopted before or after ‘exit day’, meaning Parliament is being asked to pre-emptively grant the Government the power to implement EU legislation which currently exists only in draft form. Moreover, the EU proposals covered by the Bill could be implemented domestically “with any adjustments the Treasury consider appropriate”. Whether this could prove problematic from a democratic and accountability perspective in relation to the investment firm review is not yet clear: if the final substance of the legislation is agreed between the Parliament and the Council before the UK leaves the EU, there would be more clarity about what the Government could implement domestically under the Bill.

3.17However, if the proposals are not adopted until well after the UK ceases to be a Member State, the substance of the legislation could diverge substantially from the current situation (as the Treasury and Prudential Regulation Authority would no longer be part of the negotiations, nor have a vote). In any event, the Treasury’s power to make “any adjustments” when implementing pending EU proposals in a ‘no deal’ scenario is very wide, and any Statutory Instruments made under the future Act should be scrutinised carefully. We note in this respect that the Bill could make it considerably easier for the Government to ensure the UK’s investment services regime remains aligned with the EU’s to the extent necessary to obtain an equivalence decision after Brexit, as described above.

3.18In light of the likely impact of these proposals in the UK, whether by virtue of the continued applicability of EU law during transition, the conditions attached to any future equivalence agreement, or the domestic implementation of the investment firm review by Statutory Instrument, we retain them under scrutiny. However, we are content to grant the Minister a scrutiny waiver to enable the Government to support a general approach at a future Council of Ministers meeting, if doing so is considered to be in the UK’s interest. We would expect to be informed of the outcome of any ministerial discussions, and other developments in the legislative process, at the earliest opportunity.

3.19We also draw these developments to the attention of the Treasury Committee, given its interest in the regulation of the UK’s financial services industry.

Full details of the documents:

(a) Proposal for a Regulation on prudential requirements for investment firms: (39397), 16017/17 + ADD 1, COM(17) 790; (b) Proposal for a Directive on the prudential supervision of investment firms: (39400), 16011/17 + ADD 1, COM(17) 791.

Background

3.20The European Commission in December 2017 published legislative proposals for a prudential regime for investment firms across the European Union, after a review found that the current capital requirements for the smaller companies in the industry, based on the prudential regime for banks, was too complex and did not adequately take into account the specific prudential risks faced by investment firms.60

3.21As we described in more detail in our initial Report of 28 February 2018, the Commission has proposed to create a new classification system for investment firms governed by the Markets in Financial Instruments Directive and Regulation (MiFID II and MiFIR), consisting of:

3.22The categorisation of individual companies would be based primarily on the worth of a firm’s assets, but also the specific type of investment services offered. Class 2 and 3 firms would fall under a new prudential framework calibrated specifically to the risks of the investment industry. There would also be a new set of prudential and governance requirements for the Class 2 firms, including on remuneration policies.61 (Although there is no equivalent to the “bonus cap” that applies to banks under the Capital Requirements Regulation, the proposal would require investment firms to set “appropriate ratios” for variable remuneration.)

3.23Class 1 firms would remain subject to stricter prudential rules applicable to the banking industry as they are now. However, in anticipation of an expected shift of operations by UK-based large investment banks to the Eurozone due to Brexit, the Commission also proposed to make class 1 firms subject to centralised supervision by the European Central Bank’s Single Supervisory Mechanism (SSM). The logic behind this move is that it would prevent UK investment firms from ‘shopping around’ for the most light-touch national prudential approach within the Eurozone, because the ECB would be the supervisory authority in any event.62

3.24The Economic Secretary to the Treasury (John Glen MP) submitted an Explanatory Memorandum on the proposals in January 2018. Overall, the Minister welcomed the approach taken by the Commission, which he said would “provide a good basis for a new prudential regime for investment firms” and could “have significant benefits for UK industry” given the concentration of such firms in the UK. He added that the reforms were especially important to the UK, which currently host “around 55% of EU investment firms […], including all eight systemic investment firms”.

Equivalence for UK investment firms after Brexit

3.25The final element of the Commission proposals for the regulation of investment firms in the EU is driven directly by the UK’s withdrawal: it wants to apply more stringent assessments before non-EU investment firms’ can access the EU market without setting up a full subsidiary within a Member State. Such access by ‘third country’ firms can take place either via a branch,63 or under an “equivalence” decision under the Markets in Financial Instruments Regulation (which would allow them to provide investment services cross-border basis from their home country). Equivalence in particular offers a potential legal route under which UK firms could service professional customers within the EU after Brexit if they do not want to establish a separate presence within the EU itself.64

3.26In anticipation of the UK’s eventual application for equivalence under the Markets in Financial Instruments Regulation (MiFIR)—which can only be made once it has become a ‘third country’—the Commission proposed to modify the articles of that Regulation which govern how, and under which conditions, it can be granted. As we explained in our previous Report:

[The Commission] wants to attach more stringent conditions to the equivalence process by requiring a “detailed and granular process for the assessment” that also takes into account the third country’s “supervisory convergence”.65 It is unclear what the practical effect of this amendment would be if the UK were to apply for equivalence under Article 47 MiFIR, as the regime is untested: the Regulation only took effect in January 2018 […]. However, the clear purpose is to give the Commission more leeway to reject the request or seek to put pressure on the UK to keep its regulatory regime for investment firm aligns with that of the EU after Brexit.

Separately, the Commission has also proposed a reporting requirement for third country firms registered with ESMA under the equivalence regime […]. They would have to inform the Authority annually about the scale and scope of their activities; their turnover and assets; the arrangement for investor protection; and their risk management policy.

3.27In addition, the Commission is worried UK firms might use branches in the EU (which are a place of business, but not a separate legal entity) to provide significant cross-border investment services, ostensibly from within the EU but in actuality from the UK. Branches operate under ‘host state’ rules—meaning they can only operate within the EU country where they are based—but many Member States do allow them (subject to restrictions under national law).66 To avoid a proliferation of branches after Brexit, the Commission wants to amend the Markets in Financial Instruments Directive to report annually on the scale and scope of their activities; their turnover and assets; the arrangement for investor protection; and their risk management policy. The information gathered if the amendment is approved would then be used to assess to what extent non-EU investment services were provided subject to effective supervision within the EU itself, and if necessary form the basis for further regulatory action.

3.28With respect to these elements of the proposals, the Minister’s original Explanatory Memorandum stated only that the Government will seek to “agree stable, reciprocal arrangements” for trade in financial services which would by-pass the need for the UK industry relying on equivalence provisions after Brexit. Indeed, when we last considered the investment firm proposals, the Chancellor of the Exchequer was still insisting that equivalence should categorically not form the basis for the UK’s future trading relationship with the EU in financial services. In March 2018, the Chancellor said that relying on equivalence as it exists under EU law would be “wholly inadequate for the scale and complexity of UK-EU financial services trade”, and explicitly called for a dispute resolution mechanism if the EU and UK disagree on whether equivalence should be granted (which does not exist at present). Three months later, in his Mansion House speech of 21 June 2018 he repeated that equivalence would “not provide the stability that a well-regulated market requires”.

3.29However, following the rejection by the EU of any suggestion of horizontal mutual recognition of regulatory standards for financial services with the UK, the Government has since conceded equivalence will be the main mechanism for obtaining preferential UK access to the Single Market.67 As hinted at in the Political Declaration that accompanies the draft Withdrawal Agreement, the Government wants to use the post-Brexit transitional period to secure changes to the way equivalence operates to make it more stable and less easy for the EU to withdraw unilaterally. The EU has made no explicit or implicit concessions on this point, which would require the agreement of both the Member States and the European Parliament. The positive outcome of any negotiations as far as the UK is concerned is therefore far from assured, and indeed the Declaration is entirely ambiguous (stating only that both sides will keep their “respective equivalence frameworks […]under review”). As the EU has consistently said it will retain autonomy over whether or not to grant, refuse or withdraw equivalence, it is unlikely that it would ever agree to a system where the UK might appeal such decisions to an independent body to overrule the EU.

3.30If the Withdrawal Agreement is not ratified, the EU has given no indication that it will consider any short-term equivalence decisions in relation to the UK financial services industry, with the major exception of clearing of over-the-counter derivatives by British central counterparties under European Markets Infrastructure Regulation (EMIR) until the end of 2019. We discussed the EU’s approach to trade in financial services with the UK in a ‘no deal’ scenario in our Report of 12 December 2018, and will publish a further Report shortly in light of the European Commission’s ‘no deal’ Communication of 19 December 2018.

Developments in the legislative process since February 2018

3.31On 13 December 2018, the Economic Secretary wrote to us with a further update on the state of play in the discussions on the investment firms review.

3.32In his letter, the Minister explained that the Austrian Presidency of the Council had “made considerable progress on the technical aspects of the file” in relation to crafting a unified Member State position on the new, specific prudential regime for Class 2 and Class 3 firms, ahead of negotiations with the European Parliament on the final substance of the legislation. According to the Minister, Member States have called for “technical amendments [...] focussed on injecting more proportionality for all firms” as regards governance, reporting and remuneration requirements. These suggested changes are “in line with Government objectives”. In particular, some EU countries want to retain national flexibility to introduce bonus caps for their investment industries (which the UK would oppose if mandatory, but which it is willing to accept “in the spirit of compromise” if it remains a policy choice for individual Member States).

3.33However, two major political issues remain outstanding in the negotiations: treatment of systemic, Class 1 investment firms and the third country equivalence regime under MiFIR.

3.34On Class 1 investment firms, the Government continues to advocate for a regulatory approach “which would not unduly impact the [Prudential Regulation Authority’s] approach to systemic investment firms’ designation and supervision”. Among the solutions proposed so far, the Minister says, there are some that would “introduce some flexibility for supervisors to keep large investment firms under the banking rules”.

3.35On equivalence for non-EU investment firms, the discussions in Council are currently focussing on giving a stronger supervisory role to the European Securities and Markets Authorities in relation to third country access. The Minister’s letter explains that the most recent compromise proposals would extend ESMA’s existing powers to third country firms so that it can temporarily prohibit or restrict a third country firm from marketing, distribution or sale in the Union of certain financial instruments or a type of financial activity or practice if it presents a risk to the EU market. The proposal also “outlines the actions ESMA can take in collaboration with third country supervisors, in the event it has evidence to believe that EU investors’ interests and EU markets’ order are being put at risk”, including the withdrawal of a third country firm’s registration (which would bar it from operating in the EU on a cross-border basis). Finally, it introduces some changes to the ‘reverse solicitation’ regime which allows third country firms to service European clients at the solicitation of such clients.

3.36The Minister’s letter explains that the European Parliament, which adopted its position on the proposals in September 2018, has “taken a different approach” to equivalence. MEPs want to limit the scope of equivalence under MiFIR to certain investment activities only, excluding dealing on own account and underwriting from the types of services a non-EU firm could provide within the EU even if its home country is deemed ‘equivalent’.68 The UK opposes this, and the Economic Secretary says the Treasury is “working with other Member States and the Commission on a robust position […] to counter such proposals during trilogue negotiations” with the Parliament in the future.

Next steps in the legislative process

3.37The Economic Secretary has told us he believes there is a “pathway to reaching a compromise on [the] outstanding issues” which would meet the UK’s negotiating objectives as outlined in the Treasury’s original Explanatory Memorandum in January 2018. He therefore expects that the Member States will agree on a “general approach”—a mandate for the Presidency’s negotiations with the European Parliament on the final substance of the legislation—in January 2019. The Minister therefore asked the Committee to grant a scrutiny waiver, which would enable the Government to support a general approach in the Council if the outstanding issues were resolved to its satisfaction.

3.38The Committee has been content to grant such a waiver, given the need for the UK to be able to take a constructive role in these discussions in Brussels. As we have set out in our conclusions, the impact of the investment firm review in the UK—once agreed at EU-level—remains unclear. We have therefore retained it under scrutiny, and asked the Minister to keep Parliament informed of further developments in the legislative process (and the Treasury’s assessment of their implications for the British financial services industry).

Previous Committee Reports

See (39397), 16017/17 + ADD 1, COM(17) 790: Sixteenth Report HC 301–xvi (2017–19), chapter 8 (28 February 2018).


49 The categorisation of individual companies would be based primarily on the worth of a firm’s assets, but also the specific type of investment services offered.

50 Under a separate proposal to amend the Capital Requirements Directive for banks as part of the Risk Reduction Measures package, UK investment firms which fall into class 1 (as well as large non-EU banks) could be required to establish an independently-capitalised and authorised intermediate parent undertaking (IPU) within the EU after Brexit if they had significant operations within the EU-27.

51 No ‘third country’ currently has an equivalence decision of this type under MiFIR. However, the Regulation only took effect in January 2018.

52 Article 61 of the Regulation as proposed by the Commission reads: “Where the services provided and the activities performed by third-country firms in the Union following the adoption of the [equivalence] decision […] are likely to be of systemic importance for the Union, the [the third country’s] legally binding prudential and business conduct requirements […] may only be considered to have equivalent effect to the [EU’s] requirements […] after a detailed and granular process for the assessment. For these purposes, the Commission shall also assess and take into account the supervisory convergence between the third country concerned and the Union.”

53 Separately, the Commission also proposed a reporting requirement for third country firms registered with ESMA under the equivalence regime […]. They would have to inform the Authority annually about the scale and scope of their activities; their turnover and assets; the arrangement for investor protection; and their risk management policy.

54 In this context, a branch is a place of business which is a part of an authorised investment firm, but which has no legal personality of its own and is not subject to separate authorisation within the EU. Under MiFID, branches can provide services to retail and elective professional clients in those EU Member States which allow this. Wholesale services to professional and institutional investors can only take place on a cross-border basis after ‘equivalence’ has been granted, or via a fully-authorised subsidiary within the EU (see ‘Background’).

55 In March 2018, the Chancellor said that relying on equivalence as it exists under EU law would be “wholly inadequate for the scale and complexity of UK-EU financial services trade”, and explicitly called for a dispute resolution mechanism if the EU and UK disagree on whether equivalence should be granted (which does not exist at present). In June 2018, he repeated that equivalence would “not provide the stability that a well-regulated market requires”.

56 If the Withdrawal Agreement is not ratified, the EU has given no indication that it will consider any short-term equivalence decisions in relation to the UK financial services industry, other than for clearing of over-the-counter derivatives by British central counterparties under European Markets Infrastructure Regulation (EMIR) until the end of 2019.

57 The Parliament’s position would bar non-EU firms from dealing on own account and underwriting, even if their home country had an equivalence decision under MiFIR.

58 European Commission press release, “Commission proposes to extend equivalence for Swiss share trading venues for six months“ (17 December 2018).

59 This Bill would effectively be analogous to section 2 of the European Communities Act 1972, which empowers the Government to implement EU law by means of Statutory Instruments even where it would otherwise require primary legislation. However, it is limited in time and scope.

60 In particular, the European Banking Authority and the European Securities & Markets Authority concluded that the application of banking prudential rules to all investment firms was a source of regulatory complexity, especially for smaller firms; it did not accurately reflect the prudential risks that exist in the investment industry; and there was a fragmented approach to the implementation of the rules by different Member States.

61 Class 3 firms will remain subject to the governance requirements laid down in MiFID II, but would not face any additional requirements in this area under the Commission proposals.

62 Under a separate proposal to amend the Capital Requirements Directive for banks as part of the Risk Reduction Measures package, UK investment firms which fall into class 1 (as well as large non-EU banks) could be required to establish an independently-capitalised and authorised intermediate parent undertaking (IPU) within the EU after Brexit if they had significant operations within the EU-27.

63 In this context, a branch is a place of business which is a part of an authorised investment firm, but which has no legal personality of its own and is not subject to separate authorisation within the EU.

64 The equivalence regime under MiFIR is unusual in that it specifically creates a market access regime for cross-border operations where the relevant conditions are met. Many other equivalence regimes under EU financial services law instead provide derogations from the typically stricter requirements when EU-based companies deal with foreign financial services providers.

65 Article 61 of the Regulation as proposed by the Commission reads: “Where the services provided and the activities performed by third-country firms in the Union following the adoption of the [equivalence] decision […] are likely to be of systemic importance for the Union, the [the third country’s] legally binding prudential and business conduct requirements […] may only be considered to have equivalent effect to the [EU’s] requirements […] after a detailed and granular process for the assessment. For these purposes, the Commission shall also assess and take into account the supervisory convergence between the third country concerned and the Union.”

66 Under article 39 of MiFID, EU Member States can authorise non-EU investment firms intending to provide services to retail or elective professional clients within their territory to establish a branch (i.e. a presence that has no legal personality of its own). A branch, since it is not an EU establishment, does not have the right to “passport” its services to other EU countries. After Brexit, UK investment firms that do not want to establish an independently-capitalised and authorised subsidiary in the EU may have to establish branches in every EU country where they wish to service retail or elective professional clients, subject to national laws.

68 If the Parliament’s proposals were approved, third country firms which carry out such activities would have to set up a subsidiary in the EU even if their home regime is deemed ‘equivalent’ to the EU’s.




Published: 15 January 2019