Agreement by the EU’s leaders of a Withdrawal Agreement on November 25 ought to have been a moment of certainty for European private equity and venture capital firms. In truth, of course, it would only ever have postponed the uncertainty, because the long-term future arrangements between the UK and the EU still have to be negotiated. But the Withdrawal Agreement includes a transitional period, and that would ensure a smoother ride into the next decade.

Unfortunately, however, the EU’s approval of the Withdrawal Agreement has had the opposite effect. As things stand, the UK Parliament looks likely to reject it on December 11, and the EU negotiators now say that it cannot be re-negotiated. The EU summit on November 25 has therefore increased the likelihood of a disorderly, “no-deal” Brexit in March next year.

The sentiment in Parliament may yet change. Or, if the deal is rejected in the UK, the EU negotiators may actually be willing to look again at some aspects of it despite what they now say. Several other outcomes are also possible – including another referendum. But a no-deal Brexit, even if it still seems unlikely, is the default outcome if nothing else can be agreed. According to UK law and the EU treaty, the UK is leaving the EU on March 29 and it would take new legislation, and (probably) agreement from all other EU member states, to change that. Firms cannot afford to assume that will happen in time. They need to step up their preparations, or at least they need to check that they really can afford to wait yet another month before activating their contingency plans.

The UK’s regulator, the Financial Conduct Authority, has certainly been busy preparing for a no-deal outcome. It had already published two lengthy consultation papers in October – including one on its “temporary permissions regime”, designed to allow firms from the EU to continue to operate and market their (existing) funds in the UK for a temporary period after Brexit. Last week, the FCA added another 986 pages to the weight of material for firms and their advisers to read: it published a second consultation on anticipated changes to its rulebooks if negotiations with the EU do not lead to a smooth transition.

On the whole, UK-based firms will not have to make many changes to their existing set-up: as we have reported before, existing law will be preserved with as few changes as possible to ensure that the legal rules and the FCA rulebooks still function effectively in a post-Brexit world. Although these changes largely preserve the existing legal framework for UK firms, there will be consequences that follow from other EU member states being treated as “third countries” under UK law. For example, acquisitions of control of EU portfolio companies will no longer be caught by the AIFMD’s rules as they apply to UK-regulated firms. And UK insurers will no longer get special capital treatment for investment in EU funds – unless the UK regulator makes transitional provisions to smooth this sudden change in rules.

But, of course, UK-based firms do need to consider whether their activities outside the UK will be subject to additional licensing requirements, given that a disorderly Brexit will mean immediate loss of any passports that they currently enjoy. That requires a firm-by-firm analysis of marketing and deal-sourcing in other European member states, and could force firms to build more substance in the EU, or to make changes to their structures or practices. There are difficult questions here, in part because of the differing licensing requirements and regulatory treatment of private equity marketing and deal-sourcing activities state-by-state, and the different scale of activities performed by different firms.

And anyone hoping that other regulators will ride to their rescue in that regard is likely to be disappointed: even countries, like Germany, that are proposing transitional relief for UK firms are only doing so in a limited way, and so far not in a way that helps UK fund managers.

The reality is that the impact of a no-deal Brexit can be mitigated for most European managers, provided they are properly prepared. Many have already had to spend significant sums on their contingency plans, and others – especially those in the middle of a fund-raising – will have to think carefully in the coming months about how to make sure that no-deal is not too disruptive.

There is still good reason to hope that a hard landing will be avoided, but not yet sufficient grounds to rely on it.

Simon Witney is special counsel and Patricia Volhard is a partner at Debevoise & Plimpton.

This is part of a series, European Funds Comment, by Debevoise & Plimpton.