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LHV comment on Brexit


As the final outcome of the Brexit negotiations are still unclear, it is a good time to share some information and a few guidelines from our bank’s point of view. First and foremost, – LHV’s current regulatory status. LHV Pank currently operates in the UK as an inwardly passported EEA credit institution. LHV is primarily supervised by the Estonian FSA and the FCA in the UK. With Brexit, the existing framework will be discontinued. In order to provide access to the British market to EEA firms, the Prudential Regulatory Authority (PRA) has released the framework of the Temporary Permission Regime valid until end of 2020. LHV applied for the Temporary Permission access and received confirmation from the PRA in January that Temporary Permission regulation is applied to LHV and we can continue to operate Under the current framework until 2020 year-end. This gives us a comfortable window to proceed with the process of getting LHV regulated as a third country branch in the UK.

LHV’s view on UK regulated firms’ operations in the EU

The final outcome of the Brexit negotiations will have a considerable impact on the regulatory arrangements of LHV’s clients. If there is a deal with an implementation period valid until 2020 year- end, the immediate effects will be minimised and status quo maintained until the end of this period. This will give UK and EU regulated firms the opportunity to apply for the requisite regulatory licences for their planned business. However, should a no-deal, so-called “hard Brexit” happen, UK-regulated clients will need to ensure they hold the regulatory licences required to continue to service EEA-based customers. LHV is required by the Estonian FSA to ensure that its clients hold the appropriate licences for all activities undertaken. Accordingly, LHV expects that its UK-regulated clients should analyse their unique business activities and formulate a documented position on continuing to service EEA based clients based on applicable law and regulations. The following aspects should be considered when conducting this analysis:

  • If the actualy service offered requires regulation (contrast deliverable FX against payments)
  • What the end client is (e.g. retail or institutional client)
  • How the client base was acquired (e.g. passive or active client acquisition).
  • “Characteristic performance” i.e. identifying where the mechanics of regulated service occur
  • Exemptions available (e.g. PSP to PSP services)
  • Any continuity arrangements in place at a jurisdiction level

There is no clear answer as to if EEA clients can continue to be serviced, conclusions may differ according to varying products, Client bases and jurisdictions serviced.

The only clear aspect at this stage is that analysis on this topic should be thorough, reasoned and well documented.

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