“Things are moving very quickly now,” said Hufeld. BaFin’s President is awaiting 31 December with bated breath. This date marks the end of the transition period in which EU law remains applicable in the United Kingdom although it has left the European Union (see info box below). From 1 January 2021, third-country rules will apply to the UK in matters relating to EU financial market regulation.

This means that the banks and other financial entities that are based there will lose their European passporting rights and will no longer be able to serve their customers in the European Economic Area (EEA) based on these rights. A solution to this problem is to open a branch early enough in one of the remaining EEA countries – in Germany, for example. BaFin has already received a large number of applications for authorisation: more than 60 financial entities want to establish a branch or expand their business in Germany. BaFin has already given the green light to 49 credit institutions, investment firms and financial services providers.

“The speed at which further applications can be accepted depends, of course, on when we receive them and whether all of the required documents have been provided,” Hufeld explained. He also advises the companies that are still hesitating or that are unsure whether to make the move to the continent/Germany to get in touch with BaFin promptly.

Finalising preparations

BaFin's President is also urging the financial entities that have already made good progress in their preparations to take advantage of the last few weeks that remain: “Companies must continue their efforts and actively manage their relocation plans.” He noted that this was not just a matter of individual institutions moving to the continent but also a matter of financial stability. He also pointed out that BaFin had made it clear right from the start what it expects financial entities and their management to do: to have an ongoing and appropriate presence that is fully functional from day one and that consistently complies with all supervisory requirements after that point in time, too. This also includes a functioning risk management system.

BaFin considers that most of the institutions that are seeking to open a branch in Germany are relatively well-prepared from a legal and organisational point of view and in terms of IT. “We can see that these institutions have made a lot of progress with regard to the migration of IT infrastructure, staff and balance sheet items and as far as legal amendments to contracts are concerned,” Hufeld commented.

However, Hufeld believes that further action urgently needs to be taken in one area: “Customer involvement is needed in the context of relocations, so no matter how well financial entities prepare, if their customers are hanging back, they have a problem.” His message is clear: “The clock is ticking. Companies should be putting some pressure on their customers – otherwise there will be a significant backlog by the end of the year, and that isn’t good.”

Competition to attract business continues

BaFin’s President is pleased that Germany has proven to be an attractive location. But in his view, it would be wrong to believe that the competition to attract companies relocating due to Brexit would be over on 1 January 2021. Hufeld is certain that “this will continue beneath the surface”. He took this opportunity to reiterate that BaFin is not involved in promoting Germany to companies seeking to relocate: “This isn't our job; not directly at least.” According to Hufeld, BaFin is responsible for ensuring stable conditions on financial markets despite Brexit and explaining the legal requirements to the companies that want to move to Germany. “We make the country a more attractive location through our high-class supervisory practices, quality, pragmatism and reliability,” he added.

BaFin has had hundreds of discussions to this end and has provided companies with key information during workshops and on the BaFin website. It has also answered many detailed questions by communicating directly with these companies. This is an approach that has proven effective and BaFin will continue to follow this approach when the next phase begins on 1 January 2021. “At that point, there will still be questions about implementation,” Hufeld anticipates. BaFin will be on the ball, he added.

Equivalence agreements

How will the EU deal with UK financial entities in the coming year or later if they want to conduct business with customers in the EEA but do not want to relocate their registered office to the EEA? Will these entities be given access to the EEA? Such regulatory issues are not expected to be addressed in a free trade agreement. The European Commission will therefore need to decide on a case-by-case basis whether the British supervisory regime is equivalent to that of the EU – as it has done with other third countries.

It has recently reached a first and particularly important equivalence decision on central counterparties (CCPs). The European Securities and Markets Authority (ESMA) then declared at the end of September that it would recognise the British CCPs ICE Clear Europe Limited, LCH Limited and LME Clear Limited as third-country CCPs in accordance with the provisions of the European Market Infrastructure Regulation (EMIR) from 1 January 2021 (see ESMA website).

The purpose of the equivalence agreement in place is to allow European market participants to continue their clearing activities via CCPs in the UK for the time being. If this were no longer possible overnight, it could jeopardise financial stability. The decision to recognise these CCPs in the UK will remain in force until the end of June 2022. The European Commission expects business activities to be gradually transferred to the EEA until then. This period will also allow ESMA to examine whether any of the CCPs in the UK are of such systemic importance for the EU that their clearing services should not be offered outside the EU.

Working together with our colleagues in the UK

In addition to equivalence agreements, it is also crucial that BaFin continues to work closely with British supervisory authorities. “We got in touch with our colleagues in the UK early on. Many years of close cooperation really pay off in such situations,” Hufeld explained. It is now important to develop sustainable ways to work together with the British supervisory authorities, including after Brexit. BaFin has entered into various bilateral memoranda of understanding for this purpose. The three European Supervisory Authorities and the European Central Bank have also signed such agreements with the United Kingdom. The agreements will enter into force when the transition period ends – on 1 January 2021.

Looking beyond Brexit

Although Brexit is currently a major topic, Hufeld stressed that it is important not to consider the United Kingdom exclusively within the context of Brexit. “It is unfortunate that Brexit has happened but it is simply a reality. We should make the most of it and not forget that we, as members of the EU, still share many interests with the British – in the area of global competition, for instance. If we lose sight of this, other locations – outside Europe – would benefit from this instead.”