1. Post-Brexit Operational Models of UK Financial
Institutions in Italy and the EU
A Primer on Possible Relocation strategies
December 2018
2. Brexit potential implications
2
Brexit – especially in its “hard” version – would significantly impact the ability
of banks, investment firms, fund managers, insurance companies, and other
regulated entities having their registered office in the UK to continue to carry
out their operations in the European Union.
UK-based regulated entities might seek to relocate their activities and
functions to the EU in order to maintain access to the EU market, through the
EU “passport”.
While “one-size-fits-all” solutions do not exist, the purpose of these slides is to
outline a tentative array of “levers” which intermediaries could consider using
to define relocation strategies.
The actual feasibility of any relocation strategy will of course have to be
carefully verified in light, among other things, of the specific circumstances and
of the laws of the various jurisdictions involved.
3. Background: ESAs’ guidance
3
The European Supervisory Authorities (ESAs) have provided their guidance on the
modalities through which (i) UK-based regulated entities should carry out the relocation
process to the EU, and (ii) EU national regulators should carry out their supervision on the
relocated entities.
In particular, according to the ESAs, the relocated EU entities:
shall have adequate substance to identify and manage the risks they generate from
the first day after the withdrawal of the UK;
shall be established in Member States in which they actually operate;
should avoid to outsource outside the EU their most important and critical functions
(internal control functions, IT control infrastructure, risk assessment, compliance
functions, key management functions and sector-specific functions).
The ESAs require national EU Regulators to assess the requests for authorization filed by
UK-based entities in light of the principles above, in order to exclude that the relocation to
a specific Member State is carried out solely for the purpose of maintaining access to the
EU market and of evading stricter standards in force in the countries in which the UK
entities carry out or intend to carry out the greater part of their activities.
Similar stances must be expected also by local regulators.
4. 4
Relocation process rationale
Maintaining access to
the EU market
Limiting regulatory
obligations and costs
connected with the
post-Brexit
reorganization
Maintaining the
involvement of UK-
based resources in the
EU business
Mitigating the risks of
challenges by EU
Regulators
Strategic drivers Elements to be analyzed
Coherence of the
relocation process with
the entity’s strategic
drivers
Potential risks and
mitigants
Implementation costs
and timing
Regulatory constraints
Connection between
the relocated EU
entity operations and
the Member State of
establishment
Local retention of
risks and
responsibilities
No «empty shell» or
«letter-box» entities
Appropriate local risk
management and
organization
Regulatory constraints
5. The relocation process: certain possible key points
5
Possible actions Points of attention
1 . Establishment
• Creation of an EU hub which could operate
out of its Member State into other EU
Member States under the freedom to provide
services or establishment regime.
• To be assessed the possible establishment of a
UK branch of the EU hub and/or of a
relocating UK entity’s representative office in
the Member State of establishment of its EU
hub.
Entrusting the role of EU hub with a UK relocating entity’s EU
subsidiary/branch already existing – instead of establishing an ad hoc
entity – could allow the relocating entity to leverage on the
«substance» of the subsidiary/branhch.
The EU hub should be able to demonstrate how the Member State of
establishment is related to its operations and programme.
The EU hub should not excessively rely on its UK branch(es), if
established, to carry out its activity.
The UK relocating entity’s representative office (if established) shall
not carry out any regulated activity.
2. Internal organization
• The organization structure of the EU hub
could contemplate:
o outsourcing of certain activities to the UK
relocating entity
o transfer of certain of the UK relocating
entity’s employees to the EU hub;
o partial/full timr secondments of
employees of the UK relocating entity to
the EU hub
o partial/full-time secondments or transfer
of employees of the UK regulated entity to
the UK branch of the EU hub.
Outsourcing shall not be used with the intention of stripping the EU
hub’s corporate substance and of setting up only a legal vehicle with
the sole purpose of benefiting from an EU passport. In particular, the
EU hub should not outsource to the UK relocating entity any critical
and decision-making function.
The EU hub shall have internal functions in place able to manage the
risks related to the outsourced activities and to re-insource the latter,
if needed.
In principle, any client-facing activities with EU clients would have to
be properly allocated (risks connected with involvment of UK
relocating entity’s employees).
3. Intragroup
arrangements
• The EU hub could enter into intragroup
transactions with the UK relocating entity
(e.g. to structure certain products without
having all the necessary infrastructure or to
fund its operations)
Back-to-back transfers of risks by the EU hub the UK relocating entity
shall be carefully scrutinized.
6. Disclaimer
6
The content set out in this document is for general information purposes only and does not
contain any legal advice. No one can rely on this presentation and we do not assume any
responsibility or liability in connection thereof.
This presentation provides certain general forward-looking considerations that will have to
be deepened from a number of perspectives (regulatory, employment, tax, etc.), also in light
of outcome of the UK withdrawal negotiation with the EU.
The feasibility in practice of any of the initiatives envisaged herein will also depend on the
legal and regulatory framework of all EU Member State in which the same initiatives would
be implemented, as well as on the provisions, guidance, and practice, of the relevant
national Regulators and Authorities, including in the form of “moral suasion”.