Asset managers have been warned to "prepare for the worst" in terms of access to European investors and markets post-Brexit, with the UK government's decision to suspend Parliament looking set to delay the passage of vital financial services legislation.
While Parliament has "onshored" aspects of European financial services legislation in order to prevent major disruption to UK firms after Brexit, the amended Financial Services Act (aFSA) has not yet been passed in its entirety; there is therefore potential for the door to Europe shutting on UK firms in the event of no deal.
Owen Lysak, partner at law firm Clifford Chance, said financial services clients contacted the firm due to fears regarding the impact of Parliament's prorogation, and he had told them to "prepare for the worst and all [their] planning needs to be on that basis".
While Parliament has "onshored" aspects of European financial services legislation in order to prevent major disruption to UK firms after Brexit, the amended Financial Services Act (aFSA) has not yet been passed in its entirety"
He explained the suspension has had "a big impact on the parliamentary timetable" and there are a number of acts going through Parliament subject to delay such as the aFSA and its "second wave of statutory instruments to complete onshoring" that "might not be done" if the UK leaves without a deal on 31 October.
Lysak said there are also concerns regarding the EU's perception of the UK's "intentions in terms of maintaining equivalence" in the future and what that could mean for its attitude towards UK firms.
The UK has been onboarding EU financial legislation into law and regulatory practice since negotiators confirmed the country's intention to leave the single market, thereby ruling out sector-specific arrangements (such as financial services passporting) that would effectively maintain existing arrangements.
Onboarding is therefore a necessary part of being deemed "equivalent" by the EU, thereby granting market access in certain activities as the regulations that underpin them are considered to achieve comparable outcomes to EU regulations.
Parliament was warned in an August briefing paper found in the House of Commons Library that "in the event of no deal [the Bill] would have enabled [EU regulations] to continue for two years after Brexit", but if the Bill does not pass and the UK leaves with no deal "alignment with the EU after Brexit will require new primary legislation".
The report, penned by Steve Browning and Federico Mor, said a no-deal Brexit "makes the quest for equivalence more difficult" and "leaving the EU without a deal means the UK would revert to third-country status", thereby restricting its access to EU markets.
For its part, the Financial Conduct Authority has been amending its rulebook, securing new powers from the Treasury and signing memorandums of understanding (MoUs) with European regulators in order to ensure as little disruption as possible to regulated firms post-Brexit.
However, Lysak explained while "MoUs need to be put in place for certain issues", they are "not necessarily linked to equivalence", thereby bringing into question firms' access under issues such as MiFID, via which "the UK would need to be deemed equivalent… giving portfolio managers the ability to register in the EU and have something similar [to their current access]."
He said while access to EU clients remains in question, there are issues such as "access to (EU-based) stock exchanges and clearing facilities that are based around equivalence", in the case of "any exchanges that base access on coming from the equivalent jurisdiction".
Lysak added: "There has been a working assumption that while the politics is hard, there is no reason the UK should not be held to be equivalent, given that on day one it will be exactly the same. But that is based around the onshoring being complete and there being no gaps in implementation - and it does not look like that is going to be the case now."
This article was first published by Investment Week, a sister title to International Investment.