The CRD IV package (the CRD), consisting of the Capital Requirements Directive (CRD IV) and the Capital Requirements Regulation (CRR), is the mechanism through which the EU has been implementing Basel III, the global capital adequacy framework. To place the CRD in its global context, Basel III was implemented in the US by the “Dodd-Frank” Act and the interplay between these two sets of rules impacts on the relative competitiveness of US and EU institutions, as well as the product lines that banking institutions can offer to customers and the types of debt and equity instruments sold to investors.
The CRD package of reforms was adopted and published in the first half of 2013 and, by 1 January 2014, the majority of provisions had been implemented.
Scope of the CRD
The CRD IV contains provisions which govern matters relating to credit institutions (banks and building societies) and some activities carried on by investment firms. For the purposes of this note, these institutions are collectively referred to as “CRD Firms”. The scope of CRD IV includes:
- The authorisation of a relevant business as a CRD Firm
- The acquisition of certain qualifying holdings in a CRD Firm
- The exercise, by a CRD Firm, of the freedom of establishment and of the freedom to provide services
- The relevant powers of regulatory authorities in home and host member states
- Supervision of CRD Firms and the amount of initial capital they are required to hold
The CRR lays down rules concerning general prudential requirements that institutions supervised under the CRD must comply with.
CRD Firms and Brexit
Globally, the financial services sector is one of the most heavily regulated sectors and, from a legal perspective, institutions must comply with regulation current in each country in which they operate. Under the rules of the World Trade Organisation, governments are given the power to restrict cross-border financial services on the basis of prudential controls. As a result of this, firms often need to incorporate a subsidiary in each other jurisdiction in which they wish to operate, with consequential costs, but with the assurance that each entity is compliant with the local regulatory regime.
Matters are very different within the EU where member states have agreed a common set of financial rules and regulations. Under this legal regime, firms that obtain authorisation from a national competent authority (e.g. the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) in the UK) are then free to offer services throughout the EU member states without any need for further local authorisation.
This is known as the “passport”, the potential loss of which is at the centre of the financial sector’s concerns over Brexit.
Passporting under the CRD
Under the CRD, a CRD Firm authorised in an EEA member state can carry on CRD activities, in another EEA member state on a cross-border basis or through a branch.
Activities that can be passported under the CRD include:
- Taking deposits
- Financial leasing
- Payment services
- Guarantees and commitments
- Trading for own account or for the account of customers in money market instruments and foreign exchange, financial futures and options, exchange and interest-rate instruments, and transferable securities
- Participation in securities issues and related services
- Advice to corporates on capital structure, industrial strategy and services relating to corporate mergers and acquisitions
- Money broking
- Portfolio management and advice
- Safekeeping and administration of securities
- Credit reference services
- Safe custody services
- Issuance of electronic money
The same firms may also have passport rights under the Markets in Financial Instruments Directive (MiFID) to provide investment services and activities on a branch or services basis.
Figures quoted in September 2016 confirm that 102 firms have passport rights under the CRD from the UK whilst 552 firms have passport rights into the UK under the CRD.
If the outcome of Brexit were to be that the UK would to join the EEA then passporting rights would continue to be available as they apply across the entire EEA and not just the EU, provided that the CRD has been incorporated into the EEA agreement. The CRD is EEA-relevant and is intended to be incorporated into the EEA agreement.
If the UK leaves the EU and does not join the EEA, UK CRD Firms will not have passporting rights, except to the extent that EU legislative acts permit similar rights to financial institutions based in non-EEA member states (so-called third countries).
CRD and third country firms
If the UK is not a member of the EEA after it leaves the EU, it will become a third country. Some, but not all, EU financial services legislative acts contain third country regimes which allow financial institutions based in third countries to gain access to EEA markets, usually based on the pre-condition of deemed “equivalence”. Thresholds for demonstrating equivalence are laid down in EU legislation and being granted equivalence status requires a decision by the EU Commission.
Third country regimes offered by EU law are multiple and diverse, but they do not offer comprehensive access to the single market across the full range of financial services business lines.
The CRD does not contain any mechanisms allowing passport rights to CRD Firms located in third countries nor does it create any other gateways. This leaves those institutions to establish fully authorised subsidiaries in the jurisdiction where they wish to carry on activities.
The CRD does, however, go as far as recognising that a member state can, at its discretion, allow third country banks to establish branches in its territory on condition that the regulation and supervision of those branches must be equivalent, if not more stringent, to that of branches established by banks from other member states.
It also provides a window with a view to harmonising the treatment of third country banks by allowing the EU to negotiate an agreement with a third country which would ensure that branches of banks from that country are treated in the same manner in different member states across the EU.
An uncertain future
In March 2019, when the Article 50 notice period runs out and in the absence of a bespoke agreement with the EU and/or special transitional arrangements providing continuity with the current regulatory regime, financial markets participants in the UK will presumably lose their passports to the single market and, with that, the possibility to initiate new business in the EU.
Furthermore, it seems unlikely that these firms will be permitted to continue to service legacy business, since this in itself would constitute providing services or carrying out activities in the EU.
This represents the “cliff edge” scenario, so often quoted, for those market participants who currently provide services in product or service areas not covered by third country regimes discussed above.
The ability of UK CRD Firms to continue to provide services to EU clients on a cross-border basis will depend on member states’ local law. The default position under the CRD is that these firms will need to establish separately authorised branches or subsidiaries in the EU in order to continue to service EU clients. Furthermore, even if a UK CRD Firm established an authorised EU branch, this would not enable it to provide banking services on a cross-border basis into other member states.
A key priority for CRD Firms will be that the UK government secures access rights for CRD banking services and “grandfathering rights” so that they are able to continue to provide these services on a cross-border basis to EU clients in relation, at the very least, to existing business.
All information correct at the time of writing (August 2017).
Penny Sanders is director and head of financial services regulation at Gowling WLG.
 Letter sent from Andrew Bailey, Chief Executive of the FCA, to Andrew Tyrie, Chairman of the House of Commons Treasury Committee at the time.
 General Agreement on Trade In Services, Annex on Financial Services, para 2(a)