Brexit – A new law decree sets out grandfathering rules for UK firms
On 31 December 2020 a new and unexpected piece of legislation, art. 22 of Law Decree 183/2020 (the “Decree”), was issued to regulate, among other things, the activities of UK banks, electronic money institutions, investment firms and insurance companies in Italy after the end of the Brexit transition period (the “Transition Period”). Immediately after, the Italian regulators released guidance on its application.
The Decree and the ancillary guidance
Article 22 of the Decree sets out provisions regulating the activities of UK firms following the expiry of the Transition Period agreed by the UK and the EU pursuant to Article 126 of the Brexit Withdrawal Agreement, by cross-referring to the older 2019 Brexit Decree (described here).
In particular, Article 22 introduces a grandfathering period during which UK banks, investment firms and electronic money institutions that have applied for a third country license in Italy before 31 December 2020, will be able to carry out the activities and services they were providing in Italy before the end of the Transition Period, subject to certain terms and conditions. It also regulates what UK firms should do upon termination of their Italian operations and the activities of UK insurance companies no longer permitted to operate in Italy upon expiry of the Transition Period.
Shortly after the publication of the Decree, the Bank of Italy has published a communication addressed to UK banking and financial intermediaries, and a parallel one addressed to the clients of such firms. CONSOB issued similar documents in respect of UK investment firms and their clients.
The above documents set out in detail the effects of the new regulatory regime in relation to UK firms. It is expected that similar provisions from IVASS will soon follow in relation to insurance companies.
The grandfathering provisions: UK intermediaries performing banking and investment services
The Decree allows the continuation of activities for UK banks, investment firms and electronic money institutions that are operating in Italy through the establishment of branches or under the freedom to provide services regime, to the extent that such UK firms have applied for an authorisation to operate in Italy as a third country firm or for the establishment of an Italian intermediary before 31 December 2020. The continuation of activities in the absence of a licence shall last only until such authorisation has been granted or denied and, in any case, for no longer than six months after the end of the Transition Period (i.e. until 30 June 2021).
During such period, the operations of these firms shall be limited to the activities for which the authorisation is sought and solely to the managing of outstanding contractual relationships. However, in relation to OTC (over the counter) derivatives, the new rules allow life-cycle events related activities, which could also include entering into new transactions, subject to certain limitations.
Pursuant to the Decree, during such period, UK financial intermediaries and investment firms will be subject to the Italian law regime applicable to non-EU intermediaries and to the supervision of the relevant supervisory authorities.
UK banks and investment firms operating under the freedom to provide services regime (i.e., without a branch), will only be able to provide investment services to eligible counterparties and per se professional clients.
More importantly, the Decree also includes specific provisions in relation to the effect on the outstanding contracts entered into by UK institutions that shall cease their activities in Italy at the end of the Transition Period: such firms are due to refund the clients’ money, return financial instruments and other assets, according to the instructions received from their clients. In addition, with regard to loans, the Decree states that the termination of the activity, including when due to a denial of the authorisation, shall not result in changes to the time frame or modalities for the payment of interest and principal, and shall be without prejudice to the clients’ rights to make early repayments.
The grandfathering provisions: UK insurance companies
Finally, with respect to UK insurance companies operating in Italy (for which, as mentioned above, IVASS has yet to publish its additional guidance), the Decree states that as from the end of the Transition Period, they shall be removed from the Italian register of insurance companies.
They will nevertheless be allowed to temporarily continue their activities to manage outstanding contracts until their relevant expiry or termination, but will not be allowed to enter into new agreements.
In addition, the new legislation allows clients to terminate at no costs any insurance contract with such companies having a duration of more than one year and provides that automatic renewal clauses are ineffective.
Such temporary activity of UK insurance companies shall be subject to the same rules applicable during the Transition Period.
What UK firms must do
Finally, the Decree and the ancillary measures by the Bank of Italy and CONSOB also provide for certain regulatory obligations that UK firms operating in Italy shall perform in the near future. These requirements include adherence to Italian guarantee schemes and alternative dispute resolutions systems and information duties towards Italian clients and regulators.