With the UK’s departure from the European Union (EU) set to March 29, 2019, the financial services industries in both the EU and the UK expect to be vastly changed by Brexit.

There are two possibilities for how the UK will exit the EU:

  1. The UK leaves the EU with an implementation period.
  2. The UK leaves the EU without an implementation period, in which case the Temporary Permission Regime (TPR) will go into effect.

Implementation Period: With an implementation period, the UK has until December 31, 2020, to fully transition out of the EU. This allows the continuation of passporting, allowing financial firms in any EU member state to sell services in all other member states, which is a right that majority of EU/UK financial firms have utilized. After the UK’s departure, passporting will no longer be a viable option for EU firms that operate in the UK or vice versa. An implementation will extend the ability to passport until the end of 2020, allowing financial firms time to seek alternate authorizations between the EU and the UK.

TPR: Without an implementation period, EU firms that operate in the UK and UK firms that operate in the EU would lose passporting rights on the exit day of March 29th, 2019. To prevent disruption to EU firms operating in the UK, the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have proposed the Temporary Permission Regime (TPR). TPR is expected to last no longer than three years after the exit day. This plan allows for EU firms to seek the appropriate authorization and/or recognition needed by UK regulators to continue operation.

How they differ: The implementation period and the Temporary Permission Regime differ in that the implementation period was agreed to by both EU and UK governments. During the implementation period, the UK would be permitted to act as a member state, without voting rights in the EU body. TPR will only come into effect if the UK leaves the EU without an implementation period. It was created by UK regulators to deter problems created by the UK leaving the EU without a withdrawal agreement.

In the event that TPR or an implementation period doesn’t go into effect, Brexit-related regulatory issues may arise:

  1. There are trillions of pounds in existing derivatives and insurance contracts.

For derivatives to be cleared, firms are required to use a recognized venue. When the UK departs from the EU, it is likely that London would no longer be recognized as a venue to clear derivatives. This could potentially cause banks to breach existing regulations. Firms have already voiced concerns on this issue that due to the sheer volume of their positions, it would be impossible to move to an approved EU venue by the exit day. UK regulators have responded that they are prepared to issue temporary licenses to EU firms and EU regulators will likely respond in kind. However, some member states, such as France, do not have the authority to issue temporary licenses.

  1. UK firms cannot continuously trade securities with the EU unless permission is granted by the European Commission (EC).

The UK is required to demonstrate to the EC that UK financial and securities regulations are equivalent to those enforced by the EU. The commission in Brussels has issued a statement that the financial industry needs to be prepared for a variety of Brexit outcomes and should have contingency plans prepared.