Insurance & Wealth Management Issues for consideration as a consequence of the UK’s vote to leave the European Union July 2016

Contents

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Passporting

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Competition Law Enforcement (State Aid)

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Solvency II

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Insurance Distribution Directive

Competition Law Enforcement (Public Procurement)

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MiFID II & MiFIR

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Workplace Pensions

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AIFMD

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Bulk Purchase Annuities

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UCITS

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Retirement

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EMIR

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Treasury: LISA, pensions tax reform & the secondary annuity market

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Motor Insurance

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Platform SIPPs

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Diversity (Gender discrimination)

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HR & Employment (General)

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Data protection

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HR & Employment (TUPE)

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Cloud

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Anti-moneylaundering/KYC

HR & Employment (Brexit Mobility Clauses)

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Market Volatility: resulting issues

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Policyholders

Transactional issues (Restructuring, business transfers and Part VIIs)

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Distribution Arrangements

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Competition Law Enforcement (Summary)

Transactional issues (Termination rights, material adverse change clauses & deal financing)

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Competition Law Enforcement (Anti Trust)

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Competition Law Enforcement (Merger Control)

Real assets investment (investment in infrastructure & energy)

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Contact

Pinsent Masons Insurance & Wealth Management

Passporting The passports available under the various EU Financial Services directives are currently seen as one of the key issues that need to be addressed. The passports permit the free provision of financial services throughout the European Union (plus the EEA), one of the “four freedoms” that underlie the EU’s internal market; free movement of goods, services, workers and capital. Passports have been available for some time and have developed in ease of use to such an extent that it is now relatively straight forward to tick a box and trigger a fairly automatic process to permit financial services firms to undertake business cross-border. However, each country has implemented directives slightly differently and there are still local arrangements to be respected and understood when conducting business. Although there are passports and similar approaches, doing business across the EU is not completely homogenous. The model for future arrangements is still unknown. If we follow the Norwegian model or the EEA approach, the UK would have freedom to provide services but will still be required to offer free movement of people1. This approach would permit the passport to continue and could potentially be negotiated within the two year time frame which would allow for greater certainty. It might be a permanent solution or a temporary position whilst bespoke arrangements are negotiated. If the Norwegian model or any other deal that does not involve the free movement of goods and services is not followed, the default position at the exit date is the WTO regime. This would not provide passporting.

a member of the EU and therefore will be able to make use of the equivalence provisions. However, equivalence needs to be formally acknowledged by the EU and therefore is highly likely to form part of the exit negotiations. The position in respect of relevant directives is as follows:

Solvency II There is no regime under Solvency II governing the establishment of branches or the cross-border provision of services within the EU by a non-EU insurer or reinsurer. Insurers would need to obtain authorisation in a Member State (and then passport around the EEA, if necessary). Whilst there is no passport there are provisions where equivalence may be helpful: • Article 172 (equivalence of reinsurance supervision) relates to the equivalence of the solvency regime applied to reinsurance activities. A positive equivalence determination allows reinsurance contracts with firms in a third country to be treated in the same way as reinsurance contracts with EEA firms. • Article 227 (equivalence of solvency assessment) relates to third country firms that are part of EEA groups. A positive equivalence determination allows groups to take into account the local calculation of capital requirements and available capital, rather than calculating on a Solvency II basis for the purpose of the deduction and aggregation method. • Article 260 (equivalence of group supervision) relates to group supervision of EEA firms with parents outside the EEA. A positive equivalence determination allows EEA supervisors to rely on the group supervision of that third country.

Without a deal on free movement, it is likely that the UK would be treated as a third country. A number of EU treaties acknowledge the concept of equivalence; i.e. not that the same laws apply but essentially that there is equivalent protection against risks and will provide similar outcomes. The UK will be equivalent on the first day that it ceases to be 1

EU legislation applies to countries within the EEA by virtue of the text under the formal title of the relevant EU legislation in question which provides “Text with EEA relevance”. This means that the particular piece of EU legislation has been incorporated into the EEA Agreement signed between three of the four EFTA States (Norway, Liechtenstein and Iceland) and the EU Member States and in force since 1994. Broadly, the EEA Agreement extends the four EU freedoms to the three EEA signatories including free movement of peoples. Switzerland is not a signatory, but is a member of EFTA. Each piece of EU legislation which has been incorporated into the EEA Agreement is listed in Annex (IX) (Financial Services) to the Agreement.

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For sector specific updates and further insights see www.out-law.com/brexit

Insurance Distribution Directive The IDD will repeal and replace the Insurance Mediation Directive and Member States are required to bring it into force by 23 February 2018. There are no equivalence provisions under this directive for third country entities.

MiFID II & MiFIR Under the Norwegian model, the UK would still be subject to MiFID II and MiFIR in their entirety. There would be no impact to the current implementation process. However, in the event of a full withdrawal, access to the EEA single market under MiFID II and MiFIR for non-EEA firms is not straightforward. There are provisions which enable third country firms to establish branches and to provide services into the EEA, but they are subject to various criteria and restrictions.

Services without establishing a branch This is not available for firms which intend to offer services to retail clients. Under MiFIR, a third country firm may offer investment services and activities (as set out in Section A and B of Annex I of MiFID II) to clients across the EEA without establishing a branch, provided: • it meets the criteria set out in Article 46(2) of MiFIR, and appears in ESMA’s register of third country firms in accordance with Article 48 of MiFIR; and • it only offers such services to per se professional clients and eligible counterparties. Where a third country firm meets the registration requirements, it will not be subject to supervision by an EU competent authority, but by its third country competent authority. To obtain registration, the European Commission must ascertain that the relevant competent authority is “equivalent” under the criteria in Article 47. Amongst other criteria, this requires that the third country has an equivalent

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and effective system for recognition of investment firms authorised under third country laws. There must also be a cooperation agreement in place between ESMA and the relevant supervisory authorities in the third country. Third country firms registered under Article 47 MiFIR are subject to a few other minor requirements, including informing clients of the limitation of their client permissions and explaining that they are not supervised within the EEA. Where Article 47 is not met, the passport does not apply and Member States must employ their own national laws.

Establishing a branch Under Articles 39 to 42 of MiFID II, Member States may require a third country firm to establish a branch if it wishes to offer investment services to elective professional clients and retail clients. However, Member States are able to exercise an opt out from this provision. Where they choose not to adopt it, the national law of the Member State in question will apply. The UK has chosen not to adopt it under its transposition regulations, since to adopt it would require many changes to the RAO and the PRA and FCA threshold conditions. It will be interesting to see whether this has any political ramifications once the boot is on the other foot and UK firms seek to use the passport as third country firms. Where the Article 39(1) requirement does apply, third country firms must obtain authorisation in accordance with the provisions of Article 39(2). This includes ensuring that there are cooperation agreements in place between the relevant Member State authorities and the third country and a requirement that the branch has “sufficient” capital at its disposal (Article 39(2)(c)). The services for which the branch is requesting authorisation must already be supervised by the third country regulatory authority and the firm must be properly authorised in that country. Crucially, the management of the branch must comply with the corporate governance requirements set out in Articles 88 and 91 CRD IV, and the third country must be compliant with the OECD Model Tax Convention on Income and Capital. Article 40 requires the third country firm to submit certain documents to the competent authority in the relevant Member State as part of the application. Once authorised, the branch will be subject to conduct of business, market integrity and organisational requirements in MiFIR and MiFID II, which will be supervised by the competent authority in the Member State.

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Wholesale passport

The AIFM

Third country firms which have set up a branch under Article 39 of MiFID II and which are established in a third country, whose regulatory regime has been deemed equivalent under Article 47 of MiFIR may obtain an EEA-wide third country passport to provide services and activities to eligible counterparties and per se professional clients without establishing other branches. In providing these services, the firm will be bound by Article 34 MiFID II which sets out the rules for passporting by EEA firms.

Whilst the more likely impact of leaving the EU on UK AIFMs will be in relation to the marketing of AIFs, there are still implications for UK AIFMs who will no longer have access to a passport for AIF management. EU AIFMs have the benefit of a passport under Article 33. The AIFMD does contemplate non-EU AIFMs managing both EU AIFs and non-EU AIFs under Article 37 by means of a “Member State of reference” which essentially becomes the Home State for the non-EU AIFM. However, the first non-EU states assessed for these purposes in July 2015, Jersey and Guernsey, are yet to have their passports activated, and ESMA is working its way through a long list of other jurisdictions.

Important issues to consider Where a UK bank intends to use these cross-border provisions, they do not apply to the other activities which the bank carries on under CRD IV such as deposit taking, payment services and custody services (see CRD IV below). These provisions also do not allow non-EEA firms access to memberships of regulated markets, central counterparties and clearing and settlement systems in other Member States on a non-discriminatory basis under Articles 36 to 38 of MiFID II. Where a UK investment firm wishes to deal with retail clients or elective professional clients, it cannot use a MiFIR passport to do so.

AIFMD The AIFMD regulates the activities of alternative investment fund managers in relation to the schemes that they manage. Following the UK’s exit from the EU, it would become a third country and its AIFs and AIFMs would classified as non-EU AIFs and non-EU AIFMs respectively.

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Many UK AIFMs will also be discretionary fund managers and investment advisers, and subject to MiFID II. The key here will be in ensuring that the activities of the AIFM do not conflict with the MiFID II position.

Marketing The AIFMD provides two routes for marketing within the EU: the EU marketing passport and the national private placement regime. Under the EU marketing passport route, EU AIFMs can market EU AIFs to professional investors through a simple notification process which allows EU AIFMs to benefit from authorisation in an EU Member State in order to freely market in other EU Member States. The AIFMD applies fully to these EU AIFMs. Under the national private placement route, non-EU AIFMs marketing EU or non-EU AIFs and EU AIFMs marketing non-EU AIFs must comply with the individual requirements imposed by each EU Member State. Some provisions of the AIFMD such as providing annual reports, disclosing information to investors and reporting to the national regulator will also apply.

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It is envisaged that the passport route will eventually be switched on for non-EU AIFMs and non-EU AIFs so that the national private placement regime will no longer be used for marketing. However, the AIFM would have to be authorised in an EU Member State of reference, comply with the requirements of AIFMD, and maintain a legal representative in the EU.

UCITS The passporting rights under the UCITS Directive permit management companies to establish branches or provide cross-border services into another Member State. There are variations in the provisions depending on whether the management companies will just be marketing a UCITS cross-border or will be carrying on any other investment services permitted under Article 6. Under the passport provisions in Articles 17 and 78, management companies authorised in a Member State are permitted to provide services for UCITS schemes established in another Member State. The management company’s Home State regulator is responsible for supervising the organisation of the management company, but the UCITS’ Home State regulator is responsible for supervising the establishment and functioning of the UCITS. The authorisation of a management company permits the delegation of activities. A condition for establishment as a UCITS is that the scheme invests with the aim of achieving a prudent

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spread of risk. The directive therefore sets out the range of permitted investments together with specified spread and concentration limits. For example, UCITS are not permitted to invest more than 30% of their assets in non-UCITS schemes. This could have an impact on UK schemes with investment from the EEA. UCITS also sets out the arrangements for mergers of UCITS which are permitted for schemes established in different Member States. There are no equivalence provisions for the operation and marketing of schemes under the UCITS Directive. Any schemes that are not UCITS compliant will be AIFs subject to the provisions of AIFMD.

EMIR Given the UK is already fully EMIR-compliant and is also a key member of the G20 (which agreed the global action to make derivatives markets more transparent in 2009 and to which EMIR is a response), it is unlikely that the Government would choose to disapply EMIR in the event that the UK withdrew from the EU completely. It would, however, need to implement equivalent domestic legislation as the EU Regulation would no longer apply to it. In any case, EMIR has broad extra-territorial reach and applies to all counterparties which trade in relevant OTC derivatives in the EEA (regardless of where the parties themselves are located).

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To this extent, certain obligations under EMIR would remain regardless of the UK’s position in the EU, unless the EU declares the UK’s regulatory regime equivalent to its own under Article 13. Where this takes effect, counterparties would be able to apply the law in the UK to relevant transactions rather than EMIR if they agree to do so. So far, however, no equivalence decisions of this sort have been made by the EU, but given that the UK complies with EMIR currently, one would hope such a decision could be obtained quickly (assuming that political differences can be overcome). Specifically, UK banks, insurers and other financial counterparties (as defined under Article 2(8) of EMIR) trading with counterparties in the EEA would still need to: • communicate their EMIR classification to the counterparty in the EEA (for reporting purposes); and • ensure that eligible trades are cleared through specific ESMA authorised central counterparties (UK central counterparties would require specific recognition from ESMA). Trades between UK banks and insurers and non-EEA counterparties (which would be subject to EMIR if such entities were established in the EEA) may still be caught by the requirements if they do not fall within any available exemptions and: • have a “direct, substantial and foreseeable” effect within the EEA; or • are designed to evade EMIR specifically (Article 4(1)(a)(v) and defined further within RTS 285/2014). Firms which fall within the category of non-financial counterparties under Article 10 would also still need to calculate their EMIR classification if they intend to trade relevant derivatives within the EEA to see if they fall within the clearing obligation. As alluded to above, there are specific issues which will apply to UK central counterparties and also to trade repositories if the UK makes a full withdrawal from the EU. However, these are not specifically relevant in the context of this note, though they may well have an impact on the way banks and insurers carry on their business.

Motor Insurance The current Directive2 for driving licences for EU/EEA Member States operates according to a mutual recognition of equivalence as between Member States. In order for drivers from third countries outside the EU/EEA to exchange their licence for that of the Member State in which they are residing requires there to be an ‘exchange agreement in place. If no such agreement is in place then an individual would be required to pass the relevant driving test in order to receive a valid driving licence for that Member State. The Directive governing the driving licence provisions has EEA relevance (i.e. if the UK were to follow an EEA model then the Directive would still be applicable). The Directive does not provide for equivalence determinations to be made and therefore, if the EEA model is not followed, the UK would potentially be required to negotiate exchange agreements with each of the different Member States.

Diversity (Gender discrimination) Discrimination as to the access to and supply of goods and services according to gender is prohibited by the EU3. The derogation in the directive permitting discrimination based on gender in certain circumstances was found to be invalid by the ECJ4. The directive does not contain any provisions with respect to determination of third country equivalence and does not yet have EEA relevance, although it has been deemed to be EEA relevant and is awaiting inclusion

in the EEA Agreement.

Directive 2006/126/EC Directive 2004/113/EC 4 Case C-236/09 Association Belge des Consommateurs Test-Achats ASBL and Others v Conseil des ministres [2011] ECR I-773 (Test-Achats).

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For sector specific updates and further insights see www.out-law.com/brexit

Data protection Some businesses may think that one outcome of the referendum result is that plans for the GDPR would fall away. However, the reality is rather different. There are both legal and political reasons why this is the case: • The legal reasons become relevant if we want data to be able to flow freely between the EU and the UK, which seems essential for businesses that trade globally. The EU will only allow personal data to flow outside of the UK to third countries where the protection is deemed “adequate”. Therefore, the UK will have to obtain a decision from the European Commission that its data protection laws are adequate. We wouldn’t expect that decision to be forthcoming unless the UK sticks to the key principles underpinning the GDPR. • The political reasons are that the GDPR contains many provisions that are aimed at protecting the rights of individuals and rights to privacy. Removing these may generate public disquiet if it became clear that privacy rights in the UK would be inferior than those in the EU.

Cloud Pending more guidance from the FCA, there remains a lack of clarity around certain aspects of cloud computing, such as what “effective access” to data for auditing purposes means. Restrictions around this area have to some extent been driven by the underlying EU legislation and, therefore, it is possible that Brexit would allow the UK to depart from this and clarify that remote access is sufficient rather than physical access. However for data which is flowing between the UK and the EU, “adequacy” will come back into play and so any departure from the EU position could prove challenging. So the freedom may come at a price.

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Anti-moneylaundering/ KYC Much of the reform in this area has been driven by the Financial Action Task Force, which is a member organisation of which the UK is part regardless of its EU membership. In any event the UK has tended to “gold plate” the FATF requirements to date and so it seems unlikely that the UK would adopt a more permissive regime following Brexit.

Market Volatility: resulting issues As expected, the Brexit vote has caused turbulence in the markets and a fall in the value of sterling. Insurers need to consider the effects of continued volatility for a prolonged period as political uncertainty and unpredictable economic effects continue. Some particular issues to consider now are: • the impact on meeting capital requirements in the face of volatile market values; • checking for default provisions in any loan agreements that might be triggered by economic events, capital changes or changes to credit ratings; and • checking for provisions in reinsurance arrangements on a similar basis.

Policyholders Firms should be continually considering their approach to policyholders and whether communications are needed in relation to

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specific products (eg. travel policies or policies with Europe-wide cover), or may help reduce attrition. Attrition risk would be particularly important for investment products which will be affected by the volatility in the markets. Policy terms and related customer literature should be checked for example for references to the EU, territorial scope, applicable law and provisions relating to currency and market risks, to assess whether any updates will be needed in relation to Brexit.

Distribution Arrangements In common with all important contractual arrangements, insurers should check distribution terms (eg. with brokers or IFAs) and other agreements (eg. affinity arrangements), for any provisions affected by Brexit.

Competition Law Enforcement (Summary) At the moment, it is very difficult to predict what type of exit the UK will negotiate with the EU; and, indeed, whether an exit actually will be triggered at all. In this note, however, we set out the likely implications on competition law enforcement for UK businesses, particularly within the financial services sector. Competition law is designed to ensure that anti-competitive practices do not distort fair competition. The key components of these rules are the: • ‘Antitrust’ provisions, i.e. the prohibition of anti-competitive agreements and the prohibition on the abuse of a dominant position; • Merger control rules; • State aid rules; and

Our Brexit checklist includes a list of key terms to look for in contracts generally. Distribution arrangements should be considered particularly for any cross-border elements and for responsibilities for updating customer literature. Our checklist is available at: http://www.pinsentmasons.com/en/media/ publications/the-eu-referendum/.

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• Public procurement rules. If the UK negotiates a free trade deal similar to the terms of the European Economic Area (EEA) Agreement (like Norway, Iceland and Liechtenstein), which allows it access to the single market, there will likely be almost no substantive impact on the EU competition law enforcement for UK businesses, as the EEA Agreement includes provisions that mirror those set out in the Treaty on the Functioning of the EU, meaning UK courts and

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competition authorities would likely continue to be bound by the EU Courts rulings and European Commission decisions. The main change would be that the European Free Trade Area (EFTA) Surveillance Authority would have the supra-national level jurisdiction to apply the rules, rather than the European Commission. If the UK leaves the EU altogether, without remaining part of the EEA or having a similar agreement with access to the single market, this would have implications for the enforcement of competition law. For the most part, these would be largely procedural rather than substantive. As far as State aid is concerned, this is an area of pure EU law and therefore the rules would no longer apply absent a single market deal (modelled on the EEA agreement). This means that the UK Government would be free to support UK businesses (regardless of the impact on competition).

Competition Law Enforcement (Anti Trust) EU competition law will still apply. EU competition law will still apply to UK businesses whose activities have an effect on trade between EU Member States.

UK competition law will be applied in parallel and, for the most part, consistently with the EU rules. The UK competition authorities, the CMA and the FCA (for the financial services sector), will apply the UK competition law rules in parallel with EU competition law. As UK competition law is based on EU competition law, the application of the rules will continue to be very similar (if not identical), although this may change over time.

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Currently, Article 60 of the Competition Act 1998 requires the UK courts and authorities (i.e. the CMA and FCA) to determine questions arising under the Act consistently with judgments of the EU Courts and must have regard to any decision or statement of the European Commission. If repealed, the UK courts and authorities would be able to take decisions which conflict with EU judgments and decisions. This would lead to legal uncertainty for businesses (and/ or the need for more complex arrangements to take into account the differences). However, it is likely that the UK authorities would have regard to EU decisions, at least in the short to medium term.

New UK block exemptions and sector specific guidance; an opportunity to lobby for change. There would be a change to the exemption regime. At the moment, agreements are exempt, as a result of Section 10 of the Competition Act 1998, from the prohibition on anti-competitive agreements, if they meet the criteria of an EU block exemption, such as the Vertical Restraints Block Exemption Regulation (“VRBE”). If Section 10 is repealed, it is unlikely that the CMA/FCA would take enforcement action in relation to any agreements (for example, exclusive distribution arrangements which may include non-compete provisions) which continued to meet the criteria of the VBRE unless and until there was a UK equivalent. However, there would be scope for the UK to introduce new and different block exemptions and therefore an opportunity for businesses and trade associations to lobby for this. For example, the insurance sector may lobby for an exemption to replace the current Insurance Block Exemption Regulation (“IBER”), which is likely to expire in any event on 31 March 2017. The European Commission has suggested that it will issue sector-specific guidance after the IBER lapses, but the CMA/FCA may depart from this guidance even while the UK is still a member of the EU as such guidance is, in any event, not legally binding. The UK authorities would likely, therefore, produce their own guidance to the application of the UK competition law rules in the insurance sector.

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Parallel investigations and fines; an additional burden for businesses. In terms or procedural changes, the CMA/FCA could open investigations into the same (potentially infringing) activities in parallel with the European Commission (and other national competition authorities). This would be an additional burden for businesses. There would be an incentive for the CMA to do this; in particular, if it considers that there is cartel activity which could amount to a criminal cartel under the Enterprise Act 2002. Competition law infringements investigated by the European Commission which also constitute infringements of eg. FSMA, would likely be investigated by FCA’s Enforcement division even if eg. the CMA were not pursuing their own national investigations under the UK Competition Act (as eg. happened in the LIBOR case). Total fine levels could increase as an obvious result of parallel investigations with independent authorities imposing separate fines for the same conduct5.

Cooperation agreements between the UK authorities, the European Commission and other national competition authorities. The CMA and the FCA would leave the European Competition Network (“ECN”) consisting of the CEU and the national competition authorities of the EU. This would deprive them of the intelligence shared within the ECN, including on leniency applications made by cartelists. However, it seems likely that the CMA would establish a bilateral cooperation agreement with the European Commission, similar to the Swiss competition authority. This is less extensive in terms of collaboration and information exchange than within the ECN. This may be more difficult for the FCA to negotiate. The possibility of coordinating dawn raids would likely form part of a bilateral agreement, as the CMA/FCA and the European Commission will have a mutual interest in not prejudicing the other’s investigations; a dawn raid in the EU would alert entities in the UK if not raided simultaneously and vice versa. What’s more, the European Commission would no longer have the right to carry out dawn raids in the UK and would therefore need CMA/FCA officials to carry out a raid on its behalf. The CMA/FCA would likely still honour the principles of the agreed ECN Model Leniency Programme, the aim of which was to remove certain discrepancies between the policies of the ECN Members and to facilitate multiple filings within the EU. 5

Follow-on damages claims. It is likely, in the short term, that the UK will be a less attractive forum for follow-on damages claims in respect of decisions of the European Commission and national EU competition law authorities. However, this is a complex area and will depend on a number of factors.

Competition Law Enforcement (Merger Control) The ‘one-stop shop’ of the EU Merger Regulation (“EUMR”) will no longer apply to transactions which meet the criteria for consideration under the UK merger control rules. This means that some transactions which need to be notified to the European Commission for clearance (because they meet the EUMR turnover thresholds) may also need to be notified to the CMA and/or the CMA would not be prohibited from investigating a merger even if the Commission is considering it. Because the UK operates a voluntary notification regime, the number of parallel EU and UK merger notifications/decisions is likely to be low but those mergers that are subject to parallel investigations will be the ones that raise substantive competition issues. Many will welcome this change as it gives the UK authorities the ability to investigate a merger which has a particular impact on the UK market. Although it is possible at the moment for the European Commission to refer a merger under its jurisdiction back to a national competition authority, it has refused to do so in a number of notable cases (for example, in the telecommunications sector). This change raises the risk of conflicting decisions (eg. a merger cleared at EU level but blocked in the UK). However, this is already a risk for companies which have to make multiple merger filings outside the EU.

However, the EU fine calculations could be affected if the relevant market is no wider than the EEA, which then would exclude sales in the UK in the initial calculations.

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For sector specific updates and further insights see www.out-law.com/brexit

Competition Law Enforcement (State Aid) If the UK negotiates a free trade deal similar to the terms of the EEA, this would likely entail a requirement to adhere to the State aid rules. For example, for access to the EU single energy market, it would be necessary of the UK to comply with the State aid rules. If the UK did not join the EEA but, like Switzerland, joined EFTA, the outcome would be more uncertain and would depend on the arrangements the UK were to negotiate. Absent an agreement under which the UK agrees to adhere to the State aid rules, they will not apply as they are a matter of pure EU law, enforced against the State. The UK would be bound by World Trade Organisation (WTO) rules, which are less intrusive than the EU state aid rules. For example, unlike the EU State aid system, there is no procedure under which various forms of state support have to be notified and approved by the WTO; and instead the State would need to rely on dispute settlements, without any retrospective recovery of unlawful aid. Private parties are unable to take action against measures that harm them, as only WTO member states can seek enforcement.

Competition Law Enforcement (Public Procurement) If the UK negotiates a free trade deal along the lines of the EEA or EFTA, it would need to adopt the EU procurement rules.

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In the event that this is not the case, the reality is that whilst European procurement law is about the opening up of borders to pan-European trade, at a domestic level it is also an important part of attempts to deliver value for money. In light of this, some standardised, mandated approach to competition is always likely to be required. In fact, the UK’s approach has been to go beyond the minimum requirements set by EU law.

Workplace Pensions Current workplace schemes, products and services have largely been built in response to auto-enrolment. This is very much a UK policy designed to address the fact that people in the UK are living longer and not saving enough to give them a decent retirement income. In implementing this UK policy we have borrowed from the likes of Australia, Canada, Denmark, Norway, Sweden, Poland, Uruguay and, the closest comparator, New Zealand. There is no particular reason, therefore, why Brexit should interfere with the continued roll-out and development of auto-enrolment. Indeed it would be strange to can (or undermine) a policy that’s been generally seen as a success. A review will take place in 2017 as originally scheduled and whatever comes next for auto-enrolment and the workplace schemes that support the policy will arise from that review. Contribution rates, some of the technical detail and the possible link to LISA will no doubt be considered. None of this is immediately affected by Brexit.

Bulk Purchase Annuities Our expectation is that Brexit will have a negative impact on UK BPA deal volumes in the short/medium term for a number of reasons:

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• current market uncertainty/volatility – makes it unattractive for DB trustees to transact. It could be difficult for them to be making significant investment switches in preparation for a BPA in the current environment; • Falling gilt yields and equity prices will increase DB deficits (increasing liabilities and reducing asset value). This will make transacting a BPA less affordable for many schemes, unless well hedged. Hymans Robertson have said DB deficits have increased from £820B to £900B since the Brexit vote; and • longer term, access to reinsurance markets, particularly in Europe, may become more restricted – which could have a negative impact on pricing. Some insurers, which are increasingly looking at doing BPA and longevity deals overseas (eg. the US) may be less impacted by these developments than others which are much more focussed on smaller scale UK deals.

Retirement Annuity prices have firmed up further, due to the flight to bonds and a lower interest rate environment. This increases the attractiveness of drawdown as a wait and see tool. The new wave of blended products, brought in on the back of the pension freedoms, might benefit as mass market retirees move into the drawdown but want to do so in an annuity friendly environment, i.e. which allows for gradual and flexible purchase of annuities in increments.

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Treasury: LISA, pensions tax reform & the secondary annuity market George Osborne’s Treasury projects – LISA, pensions tax reform, secondary annuity market – are under threat given his diminished political position. Further, there probably will not be the bandwidth within Government to address all these initiatives: Treasury (and the industry) will be fully engaged with the Brexit negotiations and trying to shape the future.

Platform SIPPs SIPPs and wrap platforms allow their customers to self select their investments from a wide range of assets. These asset types include collectives, stocks and shares, commercial property, more esoteric investments and in some cases higher risk investments like derivatives. Trades are generally placed by customers online through the product provider’s website.

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For knowledgeable customers who are prepared to take risks with their investments the gains can be high, but, for your average SIPP and wrap platform customer market volatility can present quite unforeseen consequences. Product providers are often the ones placing the trades, once they receive the customers’ instructions. Delays in execution can lead to arguments about responsibility. Customer terms and conditions ought to be clear about the platform not being responsible if the delay is caused by a third party. It is worth checking this, as we enter a period of volatility. The surge in trading immediately following the Brexit vote caused a number of platforms to be unable to process investor requests to trade, at crucial times. The cause was market traders being unable to serve back electronic quotes; meaning platforms couldn’t get the prices through from the markets. A good set of platform terms and conditions can ensure that, in these circumstances, the platform is not responsible for placing the customers back into the position they should have been had the delay not occurred.

Delaying Benefit decisions For SIPPs, market movements play a big part in the decision about the payment of income drawdown benefits. If a SIPP fund value is halved because a customer has been invested in a stock that reduces by 50%, there will tend to be little attraction in receiving a tax free lump sum and income that has been reduced by 50%. Customers will generally wait to see if the stock markets rally and their SIPP fund value is restored before then selling their investments to receive pension benefits. From an operational perspective, the benefit (calculation) team will see a lull, perhaps prolonged,

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followed by a rush as customers demand benefits all at once before markets move again. Expect more peaks and troughs in workflows. Market movements may also affect the level of benefits payable in the event of a customer’s death. Providers will tend to leave products invested and subject to market fluctuations until the point that the beneficiaries are determined, which can sometimes take many months to resolve. Product providers should ensure that the product values they quote are highlighted as current market value only and may be subject to change.

Cash Customers will often hold cash, rather than investments, at times of market volatility. Whilst interest rates remain low, there is little return on the sums held in cash. Fund values don’t grow as expected, leading to tetchy customers. Further, the Financial Services Compensation Scheme limits the amount of compensation that can be paid in the event of failure of a bank to £75,000 per person per bank/building society. Providers that only allow customers a single bank are effectively limiting compensation for bank failure to £75,000. Competitor firms might gain the upper hand, with customers migrating to SIPPs that allow multiple banks.

Divorce Pensions will often form part of a divorce settlement and these days the settlement mechanism is usually done by ‘pension sharing on divorce’ that allows a pension to be split between the parties in a percentage agreed by the courts, thus allowing a clean break.

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But it is exactly this percentage that can cause issues in volatile markets. If a SIPP fund has a £1 million value and is to be split 50/50 and the parties agree each will receive £500,000, that agreement will often need to be renegotiated by the parties if the fund value decreases.

There is no indication that the current volatility will be like 2008/09, but there is always the potential and the more robust systems and controls that there are in place will mean the quicker that the SIPP and wrap providers can react to the situation they find themselves in.

For example, to maintain that £500,000 is still to be debited and paid to the other party if there has been a reduction in 50% of the SIPP due to market movements would be entirely unfair and leave the SIPP fund with a zero fund value. If not correctly documented in letters to the parties, litigation can ensue if the party due to receive the £500,000 has then altered their position on the basis that this sum was to be paid to them.

HR and Employment (General)

Commercial Property Often SIPPs hold commercial property, with the customer’s business being the tenant. Usually the property is purchased using bank borrowings. In times of volatility in the market, if the SIPP customer’s business fails, it will be unable to pay the rent. No money comes in to meet the mortgage payments. The bank calls in the whole loan. The property is often the only asset within the customer’s SIPP. The SIPP provider may have to auction the property, below normal market value, in order to stave off insolvency proceedings from the bank. The SIPP provider will want to prevent insolvency proceedings in order to ensure that banks still lend to it, for other customers. Further, agreements with third parties (such as software suppliers) might automatically terminate upon an insolvency event. A fire sale of the property might settle the amount owed to the bank but often leaves no money left in the customer’s SIPP. The customer loses their business and their pension, often combined with personal bankruptcy as well. Distress aside, time spent on difficult cases can mount up. Providers might wish to plan accordingly.

Summary In 2008/09 SIPP and wrap providers re-evaluated their product terms and their operational processes, to endeavour to protect their customers, but also to better protect themselves. Trading methods, trading timing, liability clauses, better customer clarity in letters about the values of their products and methods for dealing with tenants in default were some of the areas in which improvements were made. Market volatility is a time for SIPP and wrap providers to understand the terms of their products and the consequences of worst case scenarios on their businesses and customers.

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Whilst much of UK employment law is EU derived, it is highly unlikely that we will see a mass unravelling of current employment laws. The UK has in fact gold-plated much of the EU derived laws, so it seems unlikely that there would be political will to abolish these protections just because we, in theory, have the opportunity to. Many of these protections (for example unlawful discrimination) are firmly embedded in the UK’s legal and ideological framework and removing them from our employment law regime seems highly unlikely. If the UK were to pursue the ‘Norwegian model’ post-Brexit and become a member of the EEA, the UK would remain subject to the vast majority of EU derived employment laws in any event. Any restrictions on the free movement of people will have a material impact on organisations’ ability to recruit key talent from other EU member states. There may also be implications for existing staff from the EU currently carrying out key roles in the UK. It will be important for organisations to identify their existing EU migrant population and to assess the extent to which certain functions/business units are reliant upon using employees from other EU states. We are already seeing requests from senior executives to be insulated against any decrease in the value of the pound and/or any increase in the UK cost of living. For example, through Cost of Living Allowance clauses being included in employment contracts.

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For sector specific updates and further insights see www.out-law.com/brexit

International organisations with European Works Councils should consider what will happen to current EWC arrangements. This will largely depend on the outcome of the UK’s Brexit negotiations (for example, nothing is likely to change in the event that the UK joins the EEA). There are some aspects of EU law which are arguably less embedded in the UK’s ideology. For example, the TUPE regulations, rules relating to the treatment of Agency Workers and complex ECJ rulings in relation to calculation of holiday pay. It is more likely that there would be an appetite to erode some of the unattractive and unpopular aspects of these laws.

HR and Employment (TUPE) In relation to TUPE, organisations entering into contracts for services need to be aware that it is possible that the TUPE regulations will no longer apply when the contract terminates. This could leave clients with significant redundancy costs that they have not budgeted for. Organisations may, therefore, want to negotiate redundancy indemnities and/or provisions which oblige the parties to assume that TUPE applies on termination (notwithstanding that the regulations may no longer exist).

HR and Employment (Brexit Mobility Clauses) Depending on the Brexit deal the UK manages to secure, it is possible that firms will look to change their operating models resulting in staff being moved from the City to other financial centres within the Eurozone. This will involve restructuring and redundancy exercises. Employers should also consider including “Brexit Mobility”

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clauses in employment contracts, providing the flexibility to move staff to EU centres in the event that this becomes necessary.

Transactional issues (Restructuring, business transfers and Part VIIs) Whilst there will be uncertainty for some time, both in terms of when the UK will give notice to exit the EU and what will be negotiated with the remaining EU states, any necessary restructuring planning should be started as soon as possible. If transfers of insurance business would be needed for any planned restructure which involves policyholders in other EU states, it is likely to be worth completing these transfers while the UK is still part of the EU. This is because of the EU requirement of automatic mutual recognition of these transfers by regulators in other EU states. Unless the UK can agree an equivalent approach as part of the Brexit negotiations, transfers following Brexit would be likely to require separate applications to local regulators and/or local court proceedings to be effective in the relevant remaining EU states.

Transactional issues (Termination rights, material adverse change clauses & deal financing) Brexit Termination Rights In the lead up to the referendum, we helped a number of clients to negotiate termination rights which would allow them to walk away from a deal in the event of a leave vote between exchange and completion. Now is the time for buyers with the benefit of these clauses to consider whether to invoke such termination rights or to leverage them in price discussions – some may limit the buyers’ ability to exercise

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the termination right to a specified period after the referendum result. In such circumstances, sellers may also have the benefit of cost reimbursement indemnities from buyers who trigger such a Brexit termination right.

Material Adverse Change Clauses Similar to the above, sale and purchase agreements entered into before the referendum may include material adverse change clauses which, although not specifically referencing Brexit, could allow buyers or sellers to withdraw from mergers and acquisitions following the leave vote (for example, due to volatility in the stock markets or a substantial change in currency exchange rates). This is particularly likely to be the case if the buyer is a US corporate as US practice tends to favour more generic MAC clauses.

Deal Financing For deals currently being negotiated, sellers may wish to revisit how buyers are proposing to finance their acquisitions. Whilst a falling pound may be beneficial to certain overseas buyers, raising equity finance via the London Stock Exchange and other European markets is likely to be challenging for buyers in the short term. External debt facilities should also be checked for conditions that may be affected by a potential Brexit. However, notwithstanding the challenges, the upheaval that we are experiencing may bring opportunities. The fall in the pound could make UK companies and businesses more attractive acquisition targets for overseas buyers. We would also expect mergers and acquisitions with a clear and continuing strategic rationale (for example, to counter digital disruption or drive economies of scale through consolidation) to survive the current uncertainty, albeit perhaps with a short term hiatus.

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Real assets investment (investment in infrastructure & energy) Investment in infrastructure or energy assets might well prove volatile for a period of time following the Brexit vote. In addition to the currency risks that exist in certain deals (where, for example, a large portion of the capital cost is tied to Euro or dollar exchange rates), there is the additional volatility around power prices as uncertainty on demand and supply within the UK energy market is fed from the political and economic uncertainty. Of course, both energy and infrastructure investments tend to be long term, and taking a longer view of the markets and opportunities should mean that there is a continued level of investment and opportunities to do so. Whilst markets settle, deals that have limited currency risk, high certainty of revenues and strong sponsors will still proceed. There may be higher pricing attached to debt provided by banks to reflect any perceived higher risks associated from Brexit.

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Of more significance will be the potential for changes in legislation as the UK seeks to assert sovereignty – how these changes impact on particular projects will depend on the sector and the existence of any other international obligations that curtail the much-valued parliamentary sovereignty. Both investors and lenders will seek to address change in law risk and it will impact on asset valuations and the attractiveness of certain asset classes. Meantime, we may see some attractive opportunities. Those selling assets could see a new market from more international buyers (with long-term approaches), attracted by the current low value of sterling and using it as an opportunity to buy UK assets, realising a substantial upside several years later on the premise sterling has recovered its strength. Some of these sales could be seen as win-win by both parties, whilst others might be conducted in rather more pressing circumstances.

intervention eg. Railtrack) – the energy market has had interventions of late through UK Government policies on support for renewables and other low-carbon initiatives, leading to increasing nervousness on political risk in the energy sector, but it was not otherwise a widespread concern. It appears that elements of UK political risk will be higher up the risk assessment for investments in the UK, particularly longer term investments. For investors like insurers looking to match liabilities with long-term investments, there may well be opportunities that can be taken if a robust view on risk can be taken. There is currently no certainty as to what the UK may or may not achieve in its discussions on Brexit with the remaining members of the EU. There is little point in speculating what the outcome will be. What we do know is that the whole process has created significant uncertainty and that makes a number of decisions to invest in greenfield and brownfield assets difficult.

It had been unusual for political risk to be significant in the UK (although it has always existed, with periods of higher

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Contact Alexis Roberts Partner Head of Financial Services T: +44 20 7667 0259 M: +44 7798 781485 E:[email protected]

Nick Bradley Partner Head of Insurance T: +44 20 7667 0026 M: +44 7920 296472 E: [email protected]

Colin Read Partner Head of Insurance & Wealth Management Sector T: +44 20 7418 7305 M: +44 7785 243974 E: [email protected]

Tobin Ashby Partner Insurance T: +44 20 7490 6482 M: +44 7766 808680 E: [email protected]

David Heffron Partner Head of Financial Regulation T: +44 20 7490 6500 M: +44 7775 586377 E: [email protected]

Yvonne Dunn Partner Digital/IP T: +44 141 249 5460 M: +44 7917 173269 E: [email protected]

Simon Laight Partner Pensions/BPA/Retirement T: +44 20 7490 6983 M: +44 7880 740251 E: [email protected]

Angelique Bret Partner Competition T: +44 20 7418 8218 M: +44 7733 307377 E: [email protected]

Hannah Brader Partner Transactional Issues T: +44 20 7418 7142 M: +44 7824 625403 E: [email protected]

Steven Cochrane Partner HR & Employment T: +44 20 7490 6344 M: +44 7789 397249 E: [email protected]

Stephen Tobin Partner Infrastructure and Energy Investment T: +44 20 7054 2789 M: +44 7831 236121 E: [email protected]

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This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered. Pinsent Masons LLP is a limited liability partnership registered in England & Wales (registered number: OC333653) authorised and regulated by the Solicitors Regulation Authority and the appropriate regulatory body in the other jurisdictions in which it operates. The word ‘partner’, used in relation to the LLP, refers to a member of the LLP or an employee or consultant of the LLP or any affiliated firm of equivalent standing. A list of the members of the LLP, and of those non-members who are designated as partners, is displayed at the LLP’s registered office: 30 Crown Place, London EC2A 4ES, United Kingdom. We use ‘Pinsent Masons’ to refer to Pinsent Masons LLP, its subsidiaries and any affiliates which it or its partners operate as separate businesses for regulatory or other reasons. Reference to ‘Pinsent Masons’ is to Pinsent Masons LLP and/or one or more of those subsidiaries or affiliates as the context requires. © Pinsent Masons LLP 2016. For a full list of our locations around the globe please visit our websites: www.pinsentmasons.com and www.Out-Law.com.