On 24 June 2016, the EU Referendum result was announced, with a majority of voters deciding that the UK should leave the EU. Once the government officially triggers its right to leave under Article 50 of the Treaty of the European Union, the two-year period for the negotiation for exit can start.
Immediate Legal/Regulatory Implications unlikely
It is important to remember, of course, that overnight, nothing has changed: EU law continues to apply, as do UK laws derived from the EU.
Under the formal exit process, there is unlikely to be any change to the legal framework of either the UK or the remainder of the EU immediately after the Referendum. The UK will continue to be a member of the EU for some time yet. This will allow you and your business to continue to plan and, where necessary, adapt.
In terms of legislation, the status quo should apply until the UK has formally left the EU. During the Article 50 process, and in accordance with the European Communities Act 1972 (ECA 1972), EU regulations with direct effect will have to be followed, new EU directives will need to be transposed into UK law (provided the time limit fits with the exit timetable), and the UK courts will continue to have regard to the decisions of the EU courts and European Commission practice until the formal exit has taken place.
Up until then, law makers and their advisers will have the unenviable task of assessing how to manage the unpicking of the statute book. This will not be a straightforward process, since not all EU Directives have been implemented under the ECA 1972; many have been implemented by a patchwork of primary and secondary legislation and other rules.
This will of course depend on the extent to which the UK government decides that existing EU legislation should no longer form part of English law once the UK has left the EU. However, given the pervasive nature of EU legislation (and the fact that some of it forms part of UK primary and secondary legislation as a result of the implementation of EU Directives, such as the Data Protection Act 1998), it seems unlikely that the UK government would simply repeal any part of English law that derives from the EU without having a plan in mind as to its replacement, as this would create significant uncertainty.
Key Areas to be Affected
As negotiations take place and a new deal with Europe is agreed, FinTech and AltFi companies should be specifically alert to the following areas which may be high risk:
Single Market Access: Currently, many companies authorised in the UK (both UK firms and non-EEA firms who use London as their springboard into Europe) are able to carry on business in other EEA countries with minor formalities using the EU “passport”. Unless the UK re-joins the EEA, this will no longer be available on exit, so firms will need to apply for full authorisation for a local branch or for a subsidiary in an EEA state, which is an expensive and time consuming process. Experts say that the UK may be able to apply to have its regulatory regime recognised as ‘Equivalent’. However, equivalence assessments take time and the outcome may depend on the extent to which the UK chooses to amend existing domestic law derived from Europe or decides not to replicate new EU regulations. The closer the UK stays to EU regulation, the more likely it is to be assessed as equivalent. These problems would not arise however if the UK were to re-join the EEA.
Employees: Due to the nature of the Referendum debate, it is likely that the UK will seek to impose some restriction on immigration as a result. This may result in the introduction of some form of visa system, as is currently in place for non-EU citizens. You should consider what impact that may have on your employees. If you have non-UK EU citizens working in your business or UK citizens working in your business within remaining EU Member States, then the nature of their right to live or work in the UK may be susceptible to change depending on the deal agreed with the EU.
Future Transactions/Investment: It would be wise to consider what Brexit may mean for your future deal flow. As explained above, it may affect your ability to continue to access the Single Market. This may cause you to re-assess your business strategy and where and how you make your strategic investments. This will need to be monitored over the coming months and you may need to adapt your strategies to deal with the developments.
Data Protection: Immediately post-Brexit, the UK would cease to belong to the EU “safe data” zone. In other words, if further steps were not taken to address the data protection impact, the UK would become a “third country” under the Data Protection Directive and, in the absence of an Adequacy Decision, it would be more difficult for businesses in EU and the EEA member states to send personal data to the UK as Article 25 restrictions would apply to them. In the absence of agreement between the EU and the UK to permit data transfers, UK businesses will need to find an alternative method of transferring personal data between the UK and operations within the EU.
In relation to the above risk areas, as negotiations can be expected to take a number of years, companies do not need to be overly concerned about immediate change. The Referendum result should not lead to a wave of deregulation, and companies should not be dropping their regulatory change plans implementing EU reforms.
It is also important to mention that law underpinning UK finance such as in areas of consumer credit, small business lending and crowdfunding are unlikely to change. We must remember that the FCA has led the world on P2P lending and equity crowdfunding regulation and oversight and so these industries will be unaffected in the short to medium term. In the longer term, we may not be able to access a cross-border framework, but this seems a long way away in any case.
However, this is clearly a time to be alert and responsive to whichever regulatory or legal changes may take place. As the situation evolves, alternative finance and FinTech providers will need to consider whether any changes need to be made to their standard form and other documentation as a result.