The European Banking Authority (EBA) recalls the importance of adequate preparations by financial institutions for the end of the transition period between the EU and UK. The EBA calls on the institutions to finalise the full execution of their contingency plans in accordance with the conditions agreed with the relevant competent authorities and ensure adequate communication to concerned EU customers.
The EBA draws the attention of financial institutions that the transitional arrangements agreed by the EU and the UK in the context of the UK withdrawal from the EU will end on 31 December 2020.
As also noted in the recent European Commission Notice to stakeholders, published on 7 July 2020, this means that starting from 1 January 2021 financial institutions based in the UK and not holding valid authorisation from the EU competent authorities will lose their authorisation to provide services in the EU.
Finalisation of preparations and effective establishment in the EU as agreed with relevant competent authorities.
In order to continue to provide services in the EU, relevant UK-based financial institutions need to ensure that they have appropriate authorisations from the EU competent authorities in place, including for their existing branches already operating in the EU, and fully establish those operations. In particular, financial institutions should ensure that associated management capacity, including appropriate technical risk management capabilities, is effectively in place ahead of time, and is commensurate to the magnitude, scope and complexity of their activities, to allow for effective and efficient management of risks they generate.
Moreover, financial institutions should not outsource activities to such an extent that they operate as ‘empty shell’ companies, but are expected to increase their EU footprint, including their local resources, proportionally to the amount of business carried out in and from the EU. Financial institutions should have clearly articulated and appropriate booking arrangements as also provided in the EBA Opinion on preparations for the withdrawal of the United Kingdom from the EU.
Despite significant action by many financial institutions, there is no room for complacency even for those institutions that have already obtained all necessary authorisations and permissions. Financial institutions should pay attention to a number of areas where further action stills needs to be taken. In particular these include changing and moving contracts and clients, systemic exposures to UK-based financial market infrastructures and access to funding markets, including possible related capital impacts. Institutions should also assess and take necessary actions to address any impacts on rights and obligations of their existing contracts, in particular derivative contracts.
In their preparations for the end of the transition period and ramping up their EU operations, financial institutions should duly comply with all applicable EU legislation and pay particular attention to prudential, consumer protection and AML/CFT requirements.
Preparedness of payment and electronic money institutions
Contingency plans remain especially relevant for payment and electronic money institutions, where many services in the EU have been provided by the UK-based institutions on a cross-border basis benefiting from the EU passporting arrangements.
In particular, the EBA warns UK-authorised payment and electronic money institutions wishing to continue to offer services to EU-based customers that it is illegal for them to provide payment or electronic money services in the EU after 31 December 2020, unless they have been adequately authorised beforehand by an EU competent authority. As a condition of authorisation, relevant UK-based payment and electronic money institutions are required to submit application documents that are compliant with the EBA Guidelines on authorisation and registration under the revised Payment Services Directive (PSD2). The late submission of application does not guarantee that authorisation will be granted prior to 1 January 2021 as the timeline for the completion for a new authorisation may vary significantly based on the nature, scale and complexity of the service to be provided and the quality of the application submitted. Furthermore, the submission of an application alone without receiving actual authorisation does not grant rights to continue providing payment or electronic money services after 31 December 2020 on a cross-border basis. Therefore, UK-based payment and electronic money institutions that are not properly authorised will be required to cease their activities in the EU or otherwise risk enforcement actions.
Furthermore, account information service providers (AISPs) and payment initiation service providers (PISPs) registered/authorised in the UK will no longer be entitled to access customers’ payment accounts held at the EU payment service providers and their PSD2 eIDAS certificates under Article 34 of the Commission Delegated Regulation (EU) 2018/389 will be revoked.
Communication to customers
The EBA is calling on all financial institutions affected by the UK withdrawal from the EU, and in particular, those offering financial services to the EU-based customers on a cross-border basis and benefiting from the passporting arrangement, to adequately inform their EU customers on any relevant actions undertaken as part of their contingency planning affecting the availability and continuity of such services, or whether institutions plan to cease offering services to the EU-based customers after the end of the transition period. Institutions ceasing their activity should inform their EU-based customers in due time before the cessation about the effect of cessation on the provision of services and the way to exercise their rights, in order to avoid any detrimental effects for clients.
The EBA also notes that, should EU-based customers have concerns about whether they may be impacted by the UK withdrawal from the EU, and they have not been contacted by their financial service provides until now, they have the right to contact financial institutions and their respective competent authorities directly. To this end, financial institutions should ensure adequate support and communication channels for the EU-based customers requesting information or assistance.
The EBA had supported the preparation of the financial institutions for the UK withdrawal from the EU, and in particular considering a ‘no deal’ scenario through a series of dedicated Opinions and communication statements. All of the messages highlighted in these Opinions and communications remain valid in light of the end of the transition period:
- In October 2017, the Opinion on issues related to the UK withdrawal from the EU focused on the application of the EU prudential framework for the financial institutions affected by such withdrawal, in particular in relation to (i) authorisations; (ii) internal models (iii) internal governance, outsourcing, risk transfers and ‘empty shell’ companies (iv) resolution framework; and (v) deposit guarantee schemes.
- In June 2018, in the Opinion on preparations for the withdrawal of the United Kingdom from the EU, the EBA focused on the risks posed by the seeming lack of adequate contingency preparations by financial institutions with a view to ensure that they (1) establish whether they have direct or indirect exposures to the UK, and (2) consider the risks concerned, and associated mitigating action and contingency plans, and duly execute their contingency plans.
- In December 2018, through a communication, the EBA noted progress made by the financial institutions in preparations for a ‘no deal’ scenario, but called for more action, in particular, in informing their EU-based customer.
- In March 2019, the third EBA Brexit-related Opinion focused on deposit protection issues and the need to ensure adequate coverage and protection of customers’ deposits held in branches of UK credit institutions in the EU, as well as the provision of adequate information to such depositors.
- In October 2019, in a dedicated communication, the EBA stressed the need for financial institutions to ensure the execution of their contingency plans and their establishment in the EU in accordance with the plans agreed with their respective competent authorities. Furthermore, the EBA stressed the need for Brexit-affected institutions to ensure adequate communication of Brexit-related risks, plans and changes to their EU customers.
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