October 31, 2017
Various industry bodies and regulators, including the Bank of England and Bafin, have recently raised fears that there will be a cliff edge on Brexit for certain types of financial contract, most notably derivatives and insurance, due to the loss of passporting rights.This note explains why, in a no-deal Brexit scenario, this should not be the case. The loss of “passporting” rights and other freedoms under EU treaties should neither frustrate existing contracts nor render the performance of existing cross-border UK-EU contracts illegal nor cause them to be void or voidable.
We discuss how the right to property under the European Convention of Human Rights (ECHR) and the EU Charter of Fundamental Rights, and the doctrine of “acquired rights” under public international law, protect contractual rights. The protections afforded will shield many contracts entered into between UK and EU-27 parties before Brexit and should therefore permit such contracts to be performed to their full extent in a hard-Brexit scenario. These human rights concepts will mean that, despite the removal of the financial services “passport” upon Brexit, any licensing requirements that spring into force on Brexit for parties performing existing contracts—and any other legislative changes that frustrate contracts—would be contrary to the human rights and other protections afforded to contracts entered into before Brexit.
UK-based and EU-based businesses should be cognisant of these protections and, moreover, should take additional steps to future-proof their existing contractual agreements before the UK withdraws from the EU so that they can continue to provide a full range of services to their customers.
Our previous client note on Brexit and the free movement of natural persons considered whether the concept of “acquired rights” would safeguard free movement rights post-Brexit. This note now evaluates the concept, and human rights law, in the context of businesses and contracts, with particular reference to financial sector contracts.
The ECHR is an international human rights treaty with 47 state parties, including, among others, the UK and all EU Member States. ECHR rights are afforded to everyone within the jurisdiction of a state party. Since the ECHR does not derive from the EU, Brexit will not affect its applicability in the UK or any current EU Member State. In the UK, for example, the Human Rights Act 1998 will continue to allow persons to challenge, before a UK court, UK public authorities for violations of Convention-based rights. We are not aware of any proposals among EU Member States to disapply the ECHR with respect to UK persons post-Brexit, nor would this be permitted under the ECHR.
Separately, the EU Charter, which has the status of an EU treaty, codifies fundamental rights protected under EU law and applies where a Member State’s actions involve ‘implementing’ EU law, regardless of where a claimant is located. The term ‘implementing’ has been interpreted broadly and includes not only Member States giving effect to directly applicable EU regulations, but also the exercise of discretion when implementing EU directives through domestic legislation. As currently drafted, the UK’s Great Repeal Bill specifies that the EU Charter will cease to be part of UK domestic law on or after the UK’s exit day and also seeks to extinguish most unasserted claims accrued under the EU Charter prior to exit. In addition to asserting ECHR-based rights, both non-EU and EU persons will retain the right to legally challenge remaining Member States and their respective government bodies and regulators if the EU Charter rights accorded to them are infringed by acts which involve implementing EU law.
Whether any relevant case falls within the ECHR or the EU Charter (or both), or under European Court of Justice (ECJ), European Court of Human Rights (ECtHR) or national court jurisdiction, will depend upon whether any restriction on contractual performance was imposed at EU or national level and the extent to which it can be said to derive from an EU regulation or directive.
The “right to property” is codified in both the ECHR and EU Charter and, in each case, applies to legal as well as natural persons. This right is, in principle, capable of being relied upon by businesses to protect against interference with proprietary entitlements.
Both the ECHR and EU Charter rights provide protections to persons’ “possessions.” The ECtHR and national courts have interpreted the term “possessions” broadly, autonomously from domestic law categorisations, so as to encompass many forms of property, including contractual rights. Accordingly property right protections have been found to exist in the context of many different kinds of contracts, including rights to receive rent, exclusive rights to use an online domain name, broadcasting rights, the rights between a pawnee and pawnor, contracts for the installation of solar panels and the goodwill associated with such concluded contracts.
ECtHR and national court jurisprudence provides that a contract will qualify as a “possession” under the ECHR if it gives rise to an “asset.” The jurisprudence of the ECtHR suggests that the core question when assessing intangible assets such as contracts is whether the contract in question “gave rise to financial rights and interests and thus had an economic value.” The UK courts, applying and interpreting the ECHR and ECtHR case law, have held that tangibility, transmissibility or assignability, realisability and economic value are all relevant indicia for determining whether a contract constitutes a “possession” for these purposes. The UK Court of Appeal acknowledged that “transmissibility cannot always be a touchstone of a possessory entitlement” but that it is a highly relevant factor where it does exist, especially because marketability normally ascertains the economic value of intangible rights.
Non-assignable contracts with economic value to the contracting parties are also capable of being “possessions” for these purposes. In fact, it is difficult to conceive of a financial instrument which would not have an economic value and therefore fail to constitute a “possession.” For example, under derivative contracts, cash flows may depend upon future price movements in a particular asset or benchmark, but the value of the contract is estimable and will have an economic value at any given point. Such contracts, even if subject to assignability restrictions, would have an ascertainable economic value which, by offering continued protection against adverse fluctuations, goes beyond a one-off settlement. The same would be true in principle of futures and options contracts, deposit agreements, insurance contracts, loans, guarantees and custody agreements. As a general proposition, contractual rights in the financial sector should engage ECHR protections.
The EU Charter contains a corresponding right to property that is drafted similarly to the Convention right. Where the ECHR and EU Charter contain equivalent rights, the EU Charter is to be applied at least as generously as the Convention. The ECJ has held that, under the EU Charter, “possessions” encompass contractually acquired rights which have “an asset value creating an established legal position under the legal system, enabling the holder to exercise those rights autonomously and for his benefit.” Notably, unlike the ECtHR jurisprudence described above, the ECJ did not assess the scope for transmissibility or assignability under the terms of the parties’ agreement.
Because, under both the ECHR and EU Charter, the right to property is a qualified rather than an absolute right, the state may interfere with the right, but only on certain permitted grounds in the public interest. If a state argues that its interference with the right to property is necessary to achieve legitimate aims, it must show that any action taken was proportionate to the legitimate aim pursued. A UK-based party to a financial services contract with an EU-27 customer will continue to be regulated in the UK, at least for the foreseeable future, under identical standards and by a regulator who was until Brexit an EU regulator. As a result, it is hard to conceive of a valid reason for interference with the parties’ contractual rights (as protected by their right to property).
Under customary international law, a doctrine of acquired rights has developed to protect a narrow scope of rights derived from an international treaty and vested in individuals when the treaty ceases to be effective. Once vested, such rights cannot be revoked unless there is a public purpose and compensation is provided. It has been held that “the principle of respect of vested rights . . . forms part of generally accepted international law.”
There are normally considered to be three broad categories of acquired right:
Generally, for a contractual right to be protected as an acquired right under international law, it must: (a) have an assessable monetary value; and (b) be personal in nature. Rights vested in a specific individual are more likely to benefit from protection than general rights or freedoms.
Similar principles to those discussed in relation to the ECHR and EU Charter apply to determining the applicability of acquired rights to contracts under international law.
In this section, we address only the issue of whether a contract would be frustrated or rendered void, voidable or its performance illegal as a result of laws or regulations coming into effect or being introduced as a result of Brexit, and not the other implications of Brexit which may arise depending on specific contractual terms.
A diverse range of financial services contracts have been entered into between UK and EU-27 counterparties on a cross-border basis prior to Brexit, under which prescribed activities and services will take place after the UK’s withdrawal from the EU. Service providers and service recipients may be either in the UK or EU-27. Such contracts will include, for example:
It is not necessarily the case that the human rights and international law-based safeguards discussed above will need to intervene at all in these instances, since that would only become necessary if the law, a regulator or government were to impose licensing requirements in relation to the continued performance of agreements concluded pre-Brexit or take other steps to interfere with contractual rights. As regards licensing, the International Swaps and Derivatives Association (ISDA) has observed that the continued performance of pre-existing contractual obligations under ISDA standard form documentation for derivatives transactions is unlikely to trigger authorisation requirements post-Brexit. Such performance will not involve the provision or carrying on of any investment service or activity under EU or UK regulation. Specifically, continued performance does not constitute “the reception or transmission of orders”, “dealing on own account” or “execution of orders on behalf of clients” for the purposes of the Markets in Financial Instruments Directive (MiFID), as those activities will have taken place when the transaction was entered into.
Nevertheless, the conduct of other types of ongoing financial services activity could in principle attract licensing requirements. For example, the continued administration of regulated mortgage contracts or insurance claims handling might be determined by so minded governmental bodies to require local authorisation in some EU Member States.
In our view, all of the rights under a financial instrument to perform or receive performance in respect of obligations agreed prior to Brexit will constitute “possessions” under the EU Charter and ECHR and also amount to an acquired right as a matter of customary international law. This applies even to unexercised rights, such as options that have been entered into but not exercised prior to Brexit. Simply because the parties can elect not to trigger a contractual right until a later time, as is the case for options, it cannot be argued that the right lacks an economic value or is unassignable.
As already mentioned, it is difficult to see how a regulator could succeed in showing that interference with ongoing financial services contracts in these circumstances is necessary or proportionate in order to achieve a legitimate aim in the public interest. Financial regulation is designed to maintain the integrity of financial markets and systems, for example by preventing the failure of systemically important financial institutions, preserving financial stability and protecting consumers. It could be argued that the importance of local regulation in EU Member States over service providers located in the UK pursues a legitimate public interest objective. However, we believe that the better interpretation would be that ongoing EU-27 regulation of UK service providers is neither necessary nor proportionate for pre-existing contracts, entered into in compliance with the EU’s regulatory framework whilst the UK was part of the EU. In contrast, intervention could result in the forced close-out of derivative contracts or repayment of loans which, on a widespread scale, would cause instability in the financial markets and run counter to public policy goals of financial stability.
By analogy, the European Commission has accepted that it will permit goods lawfully placed on the single market to continue to be sold and otherwise made available after Brexit. It has also stated that professional qualifications obtained prior to Brexit should continue to be recognised in the EU-27.
Certain steps carried out in connection with existing contracts go beyond merely performing pre-existing obligations. It is arguable that investment advisory services are not protected by the above rules. Nor are asset management agreements, although in most cases the service of providing asset management is treated as a matter of EU law as not being cross-border, so if it is being provided from the UK it should not trigger cliff edge issues.
Contractual rights established after Brexit, either in the context of new transactions between parties that already have a pre-Brexit relationship for that kind of service or new services between such parties, raise more issues. For instance, amending the terms of, or novating, pre-existing contractual arrangements or concluding a post-Brexit transaction under an existing ISDA Master Agreement, brokerage agreements or market infrastructure rules would typically be regarded as constituting a “dealing” activity under MiFID II. There are persuasive arguments that interference with lifecycle events under an existing contract, such as the ability of a party to close out a new position by entering into an offsetting transaction or increasing the size of that position, would deprive the parties of the full value of their concluded contracts and therefore infringe property rights. Moreover, in jurisdictions where close-out netting is enforceable, all transactions under an ISDA Master Agreement, together with the master agreement itself and relevant collateral annexes, constitute a “single agreement.” The existing human rights case law on agreements which contemplated future business dealt with non-financial contracts and it therefore remains untested how far the right to property would extend in the scenarios described above and other financial contract situations. In terms of existing business, it is possible, however, to address such issues under reverse solicitation rules, as explained below.
In order to preserve business continuity to the maximum extent, UK and EU counterparties should consider assignment clauses in their existing and prospective contracts. We are unaware of any case in which a concluded, assignable contract was held not to be a “possession” that is a priori subject to human rights protections. Whilst many financial instruments should be protected anyway by virtue of being valuable, the existence of assignment rights should put matters beyond doubt. Although the UK High Court disapproved of scrutinising the termination provisions of concluded contracts for the purposes of showing a contract does not amount to a “possession,” the existence and terms of termination for change of control and other “party-specific” clauses should also be re-evaluated.
UK and EU-27 counterparties should additionally consider entering into pre-Brexit contractual agreements, prior to the UK’s withdrawal from the EU, under which the service recipient expressly requests the service provider to carry out similar future activities, and provide information concerning new or future products or services. Such provisions will benefit from the “reverse solicitation” exclusion contained in MiFID II, other EU financial sector legislation and many EU Member State national laws. These exclusions allow non-EU firms to service existing clients and continue to perform regulated activities with an EU counterparty, provided that the provision of the service was initiated exclusively by the client. Reverse solicitation also provides a path towards servicing new business, so long as additional structures are put in place.
BaFin, the German financial regulator, has published guidance on the German reverse solicitation exclusion in the context of cross-border banking business and financial services which provides that, if a non-EU firm continues to inform its clients about its range of products within the scope of existing business relationships (which is often agreed upon in the basic contract), such business falls under the scope of the freedom to provide requested services and does not require a licence. In our view, this principle continues to apply to the similarly worded MiFID II and other reverse solicitation concepts and would protect contractual provisions established with a client pre-Brexit which cover post-Brexit dealings for existing and future service offerings. Providing information as to ongoing and new services pursuant to such a contractual provision would not compromise the fact that the underlying business relationship has been established legitimately and that it is the client who has requested any specific services rendered. The client has merely indicated a wish to put in place arrangements pursuant to which it can learn about new opportunities that the service provider believes may be of interest.
It should therefore be possible, by careful consideration of existing contractual terms, to ensure the ability of parties to existing financial contracts at the point of Brexit to continue benefitting from them to the fullest extent. This could even allow for additional actions such as portfolio compression and contractual amendments after Brexit, so long as the mechanics for these are put in place before Brexit.
By combining human rights law and taking maximum advantage of reverse solicitation regimes, there should be no material “cliff edge” for the performance of existing financial contracts or the servicing of existing customers resulting from Brexit. There are also opportunities, by introducing appropriate supplements to existing contracts, to ensure that existing business continues unaffected for a number of years after Brexit. By signing a maximal array of new clients to appropriate terms now, UK and EU-27 businesses can future-proof their relationships against Brexit. This should take much of the heat out of the perceived need to trigger contingency plans early and alleviate industry concerns about the possible effects of the absence of any transitional deal or of the new UK-EU relationship.
The authors would like to acknowledge and thank Dr. Tom Grant, Fellow, Wolfson College, Cambridge, Martin Howe QC and one anonymous reviewer for their helpful comments and suggestions on an earlier draft of this note.
 See, e.g., the Bank of England's Record of the Financial Policy Committee Meeting on 20 September 2017, available here: http://www.bankofengland.co.uk/publications/Documents/records/fpc/pdf/2017/record1710.pdf; and German regulator seeks Brexit plans from UK-based insurers, Financial Times, 30 October 2017.
 The UK Conservative Party has indicated it will remain a party to the ECHR during the course of the current Parliament. See 2017 Conservative Party Manifesto, pg. 37.
 Åklagaren v Åkerberg Fransson (C-617/10) .
 Great Repeal Bill, s. 5(4).
 Great Repeal Bill, Schedule 8, paragraph 27(1) and 27(2).
 Gasus Dosier v Netherlands (1995) 20 EHRR 403, para 53.
 Mellacher and Others v Austria, (Application no. 10522/83; 11011/84; 11070/84) .
 Paeffgen GmbH v Germany (Application Nos 25379/04, 21688/05, 21722/05 and 21770/05) (unreported) given 18 September 2007, ECtHR.
 Sky Österreich v Österreichischer Rundfunk (C-283/11) .
 Wilson v First County Trust Ltd (No 2),  UKHL 40.
 Breyer Group Plc v Department of Energy and Climate Change  EWHC 2257 (QB); Breyer Group plc v Department of Energy and Climate Change (CA)  1 WLR.
 Murungaru v Secretary of State for the Home Department and Others,  EWCA Civ 1015, para 58.
 Paeffgen GmbH v Germany (Application Nos 25379/04, 21688/05, 21722/05 and 21770/05) (unreported) given 18 September 2007, pg. 8.
 Murungaru v Secretary of State for the Home Department and Others,  EWCA Civ 1015, para 58; Breyer Group Plc v Department of Energy and Climate Change  EWHC 2257 (QB) para 51.
 R (on the application of Malik) v Waltham Forest NHS Primary Care Trust  EWCA Civ 265, para 44.
 Murungaru v Secretary of State for the Home Department and Others,  EWCA Civ 1015, para 56.
 In Paeffgen GmbH v Germany, the ECtHR appears to acknowledge that the contract in question had an inherent value to the applicant, separate from the value that could be derived from selling it to a third party: “As a consequence, the applicant could offer to all internet users entering the domain name in question, for example, advertisements, information or services, possibly in exchange for money, or could sell the right to use the domain to a third party.” (pg. 8) (emphasis added).
 Article 17 of the EU Charter.
 Article 52(3) of the EU Charter.
 Sky Österreich v Österreichischer Rundfunk (C-283/11) , para 34.
 Certain German interests in Polish Upper Silesia, Germany v Poland, Merits, Judgment, PCIJ Series A no 7, ICGJ 241 (PCIJ 1926), 25th May 1925, para 132 (the Permanent Court of International Justice being a predecessor to the International Court of Justice).
 Pierre A. Lalive, ‘The Doctrine of Acquired Rights’ In: Bender (Ed.), Rights and duties of private investors abroad - International and comparative law center, New York, 1965, pp. 183-185.; cf. South China Sea Arbitration (Ph. v Ch.), Award (12 July 2016), UNCLOS Annex VII, para 804(c); Land and Maritime Boundary between Cameroon and Nigeria (Cameroon v Nigeria: Equatorial Guinea intervening), Judgment (10 Oct. 2002), ICJ Reports 2002 pp 370, 374 (paras 107, 123); Land, Island and Maritime Frontier Dispute (El Salvador/Honduras; Nicaragua intervening), Judgment (11 Sept. 1992), ICJ Reports 1992 pp 400-401 (para 66).
 D.P. O’Connell, International Law (2nd ed.), Stevens, 1970, p.378.
 Some commentators have suggested that Article 70 of the Vienna Convention on the Law of Treaties (VCLT) could be relied upon to protect rights acquired under EU law. Article 70(1)(b) provides that, unless the parties otherwise agree, the termination of a treaty does not affect any right, obligation or legal situation of the parties created through the execution of the treaty. It is unclear, however, whether this provision would safeguard rights exercised by UK businesses for two main reasons. First, the article’s wording suggests that it only applies to the rights acquired by the parties to the treaty i.e. the states themselves, and not the individuals of those states. This is supported by commentary from the International Law Commission. Second, Article 70 is only effective if there is no overriding agreement between the states party to the treaty. The ECHR and EU Charter may therefore override the operation of Article 70, as may any future EU/UK withdrawal agreement that specifies which rights will remain available post-Brexit.
 We do not address specific contractual provisions that might be invoked by the parties as a result of Brexit, such as material adverse change clauses or the allocation of tax change risks. Separately, where a party to a contract is a consumer or personal data is to be transferred between the parties, data protection issues may arise post-Brexit. While the UK is in the same data protection regime as the EU, UK companies dealing with EU customers are not required to ensure separate local data protection compliance. Post-Brexit, transfers of personal data from the EU to the UK will be subject to a special regime set out in Chapter V of the General Data Protection Regulation. Broadly speaking, this will require compliance steps to be taken involving Member State supervisory authorities unless the European Commission recognises the UK’s data protection regime as “adequate.” However, any compliance steps that need to be taken by UK firms post-Brexit will be relatively minor and administrative in nature (e.g. additional local online registration, intra-group agreements) compared to the process of applying for a financial regulatory licence.
 Service agreements and outsourcings are generally not regulated, although if provided to a regulated EU customer the agreements may need to be reviewed to ensure their efficacy post Brexit.
 ISDA Brexit FAQs – September 2017, available at http://www2.isda.org/functional-areas/legal-and-documentation/uk-brexit/brexit-faqs-september-2017/
 Position paper transmitted to EU27 on Goods placed on the Market under Union law before the withdrawal date, TF50 (2017) 7, 28 June 2017.
 Working paper “Essential Principles on Citizens’ Rights”, 24 May 2017.
 We are of the view that individuals who currently provide cross-border advisory service from the UK to the EU-27 could continue to do so under a different banner.
 Breyer Group Plc v Department of Energy and Climate Change  EWHC 2257 (QB), para 54.
 Federal Financial Supervisory Authority “Notes regarding the licensing for conducting cross-border banking business and/or providing cross-border financial services”, April 2005, available at
https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Merkblatt/mb_050401_grenzueberschreitend_en.html. It remains to be seen though if and to what extent BaFin will revise or fine-tune its wide-ranging guidance in light of MiFID II and Brexit.