LMA Submission to the House of Lords 'Brexit: deal or no deal' inquiry
The Loan Market Association (LMA), a trade body with the object of improving liquidity, efficiency and transparency in the primary and secondary syndicated loan markets of Europe, the Middle East and Africa, believes that any sudden loss of passporting rights arising from a “no deal” Brexit could seriously damage a variety of lending and loan market activities of UK banks unless mitigating measures are put in place as part of a transition agreement.
The LMA, giving evidence to the House of Lords continuing “Brexit: deal or no deal” inquiry (following its response to the UK Treasury Committee’s call for evidence on EU Exit and Transitional Arrangements which we wrote about earlier this year), sees two particular groups of issues brought into sharp relief by this eventuality. The first relates to licensing, and the ability to do cross-border business, for both existing agreements in place at the time of the EU exit and transactions afterwards. The second arises in relation to the continuing validity and effectiveness of existing loans.
The LMA believes that lenders will need a significant amount of time to adapt, without which some participants may withdraw from loan markets and some pre-existing agreements may be affected, even before the EU exit. Alternatively, lenders would need to decide whether to invest large amounts of capital in order to move lending operations into other EU Member States. For these reasons, it is important for lenders to know as early as possible whether transitional arrangements will be put in place, and if so, what they will be.
Following EU exit, banks incorporated and authorised in the UK would no longer benefit from passporting rights and would find themselves subject to a wide variety of individual EU Member State licensing regulatory regimes which might could interfere with their ability to continue to provide cross border services from the UK to customers in those Member States. For example, would fully drawn-down loans continue to be enforceable once the passport had been withdrawn? In those jurisdictions which require authorisation to make or own loans, the situation might no longer be clear. Although the LMA did not expressly address this, the position could also be different for fully drawn down loans and for those where the banks have continuing obligations, such as revolving credit facilities.
The LMA believes that any transitional arrangements for the banking sector should be treated as separate from the overall EU exit agreement, to ensure continuity for loans and loan business from the exit date, and that such arrangements should be as broad as possible in order to maximise the scope of further discussions moving towards a final UK-EU agreement. At the very least, existing, validly authorised cross-border loans should not be affected by the termination of the rights of the organisations which made them.