German Brexit Act on banking and payment licenses for UK institutions enters into force
Brexit has a new timetable. Yesterday, the European Council agreed to an extension of the timeline contained in Article 50 of the EU Treaty from 29 March to 22 May 2019 under the condition that the House of Commons approves the negotiated Withdrawal Agreement by 29 March. This extension until 22 May will serve the purpose to allow technical preparations to ensure the due entering into force of the Withdrawal Agreement by that time. If the House of Commons does not approve the Withdrawal Agreement by 29 March, the timeline will only be extended until 12 April. In that case intensive negotiations and parliamentary debates will continue into the first two weeks of April, with unknown outcome. If no agreement on anything can be reached, the result will be a “Hard Brexit” on 12 April, i.e. the UK leaving the EU without an agreement.
In this current state of play, an update on “Hard Brexit” preparations in Germany may be of interest for UK financial institutions active in cross-border services into Germany and their regulatory advisors: What have the legislative preparations in Germany regarding “Hard Brexit” come up to?
The German legislative bodies, the Bundestag and the Federal Council (Bundesrat), have just passed a legislative act called „Brexit-Steuerbegleitgesetz“, in short “Brexit-StBG”, which to a large extent relates to tax law but also to banking and payment regulatory law.
The core element of this legislation is that the German financial services supervisory authority BaFin receives powers to exempt UK institutions from licensing requirements in Germany for up to 21 months as of Brexit day if such UK institutions will have provided banking or payment services into Germany up to and until Brexit day under current EU passporting rules. In other words, BaFin is entitled to extend the EU passporting regime for UK institutions with regard to Germany for up to 21 months. BaFin may grant these extensions to individual UK institutions on a case by case basis as well as for categories of institutions by way of general order. Obviously, these extension powers are only relevant for those UK institutions who have not yet obtained a BaFin license or a license in another EU27 Member State with passporting opportunities into Germany.
The powers granted by the new legislation to BaFin come with two significant constraints: (i) they serve the express purpose to prevent disadvantage to the functioning or stability of the financial and payment services markets, respectively, and (ii) exemptions can only be granted in respect of services which are closely related to agreements existing at the time of Brexit.
The first constraint means that BaFin will address primarily one market segment where UK institutions currently play a particularly important role, i.e. the OTC derivatives market. Examples for potential uses of these powers by BaFin contained in the parliamentary sources almost exclusively deal with derivatives such as interest rate or currency swaps. It is unlikely that BaFin will grant exemption orders for e.g. consumer credits, a market segment where UK institutions do not play a significant role in Germany.
Regarding the area of payment services, the parliamentary sources appear to be less restrictive. The parliamentary sources (see Report and Resolution Proposal by the Bundestag Financial Committee, p. 39) give the example of online merchants accepting card payments through UK acquiring institutions. According to this report, the payment services market in Germany can be impaired if from one day to the next online merchants have to switch off their online payment channels because they did not manage to install alternative payment methods with a EU27 payment service provider in advance. The report states explicitly that businesses and consumers alike require seamless online payment services. The sound of this is that the legislator does not condone any kind of disruption in the field of payment services, even if the affected UK payment institutions may have a relatively small market share in Germany. There is a good chance, therefore, that BaFin will apply this “market disruption test” in a more flexible way when it comes to payment services.
The second constraint is that only such services may be exempted which are closely related to agreements existing at the time of Brexit. This raises the question: how close must this be? In what way must the financial service provided by the UK institution to the German customer post Brexit be related to the contractual relationship existing with this particular customer prior to Brexit?
This was the subject of some debate in the Financial Committee of the Bundestag. From the opposition ranks the concern was raised that in the field of OTC derivatives many German market participants have not yet been able to shift their derivative portfolio to institutions with a Brexit-safe German market access. Therefore, in the opinion of those opposition MPs, German market participants should be allowed to do also new transactions with their existing counterparts under the new BaFin regime, as long as this takes place on the basis of existing agreements. It seems that these opposition MPs were thinking of allowing new transactions such as new interest rate or currency swaps as long as these transactions are based on pre-existing master or framework agreements.
However, the proposal for an express statutory amendment to that effect was voted down by the government coalition majority in the Financial Committee. Unfortunately, the parliamentary sources give no information on why this was voted down. Did the coalition majority MPs think that this is an unnecessary clarification? Or did they want to prevent any kind of new business to be generated under the BaFin regime given that this regime shall have the exclusive purpose of preventing negative effects in the German markets? It is likely that the latter is the case because in other parts of the report, express emphasis is made that the temporary powers assigned to BaFin “are not intended to perpetuate the current market position of the UK financial and economic sector”. Instead, the new legislation is intended to mitigate certain adverse effects of Brexit in Germany and “not to anticipate the regulatory framework of the future relationship with the UK” because this will have to be decided on a European level. This points towards a narrow interpretation in the sense that new transactions will not be allowed under the new BaFin regime. It will however be possible for BaFin to allow the restructuring, netting or prolongation of existing transactions. This is explicitly stated in the official motives of the new legislation.
Brexit-StBG is due to enter into force on 29 March. All eyes are now set on Westminster and Brussels in order to see whether this (Hard) Brexit legislation will ever have to be applied.