If you’re an in-house lawyer at a financial institution involved in updating client agreements as part of relocating your business to the EU in anticipation of Brexit, make sure that the following points have been addressed before it’s too late.
Despite a large amount of harmonisation across the EU financial services rulebook, there are a number of differences that will test any preference to keep changes to client agreements to a minimum. These tend to appear once the relocation is quite far advanced, adding pressure to the in-house lawyers who are tasked with navigating a way through the issue:
- It’s not always possible to stick with English governing law. Many firms have a preference to retain English law as the governing law of their client agreements – it is usually the current pre-Brexit governing law and is known and understood by both parties.
However, where the business is being moved to a non-UK entity, that provides services to a non-UK client, the risk that an EU member state court applies overriding mandatory provisions of local law is increased. In addition, where security is being granted under a client agreement over assets located in an EU member state, it may be necessary to do so under the law of the member state where the assets are located to ensure the security is valid and binding.
- The UK is an outlier in allowing firms to treat an agent as their regulatory client. Many firms in the UK take advantage of the ability to treat an agent as their client for regulatory purposes. This technique enables a firm to more easily and efficiently provide services to the underlying clients of that agent and is particularly relevant when dealing with asset managers who act as agent for a large number of funds.
However, this UK rule is not derived from EU legislation and is not present in the other major EU financial services hubs, meaning that firms relocating to the EU may need to treat each underlying client as their direct client without being able to stop at the agent.
This can have an impact on client classification, which can affect the firm’s business model by having a knock-on effect on which financial services rules govern the client relationship. The EU legislation does allow a firm to look to the agent in certain limited circumstances which can mitigate the impact.
- Client asset protection rules can be less flexible outside the UK. One example of this relates to EU legislation that requires client funds received by a firm should be segregated “without delay”.
The UK provides some flexibility in its implementation of this requirement under the “alternative approach”, which helps large and complex firms to manage their client accounts. This alternative approach is not offered in the main EU financial services hubs and means that firms may be under stricter requirements in terms of the timing of the segregation of client funds.
Where a firm’s operations system is set up to comply with the UK approach, it may be very difficult to change it in order to match a different understanding of “without delay”. One way in which this issue can be dealt with, is by using a firm with a deposit taking licence and receiving funds as a deposit rather than as client funds.
