What is the impact of Brexit on UK regulation?

Compliance officers in the Securities Investment Research Group (SIRG) discuss the impact of Brexit on UK regulation


The SIRG recently discussed the Financial Conduct Authority's (FCA's) announcement that the rules emanating from EU remain in place, and that firms need to continue with implementation plans for these. Firms are generally just carrying on getting ready for the Market Abuse Regime (MAR) next week. There is a question as to how authoritative this is since the FCA cannot guess what will happen in the future either.

The key question is future access of UK firms to EU counterparties and clients. Currently this depends upon the equivalence and reciprocity provisions in EU directives – which vary a lot (think derivatives clearing under the European Market Infrastructure Regulation (EMIR), prudential capital under the Capital Requirements Directive IV (CRD IV), access to exchanges and multilateral trading facilities and over-the-counter trading under the Markets in Financial Instruments Directive (MiFID), benchmark administration under benchmark regulation and rating agencies under CRA Regulation). There was concern that these may be politically linked to any UK restrictions on freedom of movement of EU nationals; a suggestion that there might be some form of grandfathering for firms currently registered/passporting – but this totally depends on politicians. There could also be a form of restricted passport for UK firms (eg, to do business with banks and professionals only, or only under some directives or on an EU country by country basis). The worst case is prohibition on UK firms to do business directly with EU banks and corporates. The UK will need to keep up to date with further EU changes to these rules (eg, MiFID III, to maintain passport).

There is a serious question about access of UK firms to euro payments and settlements systems such as TARGET2 – the European Central Bank is likely to require this to be only within the EU. This means UK firms only having access through onshore EU firms (which is real activities not paper ones) – placing them and London at a cost disadvantage. Hence commercial, retail and investment banks, commodities firms and asset managers considering setting up operations within EU and either transferring activities from London, or entirely replacing them. Favoured locations depend upon the type of business – Frankfurt for banks, Dublin (the Central Bank of Ireland has put out a paper on the treatment of funds in the light of Brexit) or Amsterdam for asset managers.

There was concern that the UK voice will be non-existent on draft EU financial services legislation – and what the areas are that are up in the air now that the UK won’t push but which may well nonetheless apply to the UK as the price of the passport. However, these are the very areas where, based on past negotiations, the UK may try to exercise ‘proportionality’:

  • financial transaction tax (though this may never happen for other reasons)
  • EUR settlement within eurozone
  • Remuneration Code including bonus cap
  • bond market liquidity/transparency
  • transaction reporting fields under EMIR and MiFID II.

We could see a two tier approach to regulations – with one set of rules for firms doing business with EU clients, and another for firms just dealing with UK clients (a bit like the current MiFID and non-MiFID business rules?).

There is the important question as to how existing and future EU rules will be changed by the UK; with a possibility of three time buckets – in force now or about to be so – such as MAR (little change likely), coming into force in the next two years; such as MiFID II (more exercise of FCA bespoke rules/implementation) and beyond a two year notice period; such as benchmark regulation (more change likely). One example is the 4th Anti-Money Laundering Directive (MLD4). Would new money laundering rules be affected? Both EU and UK rules derived from the Financial Action Task Force (FATF); however the UK FCA may have a slightly different agenda to the EU (eg, drive to cut red tape; therefore some differences possible, even likely).

There is also an interesting question as to whether breaches of rules or law now (or during the notice period) will be enforced or prosecuted. The answer is that the regulator or court will look at the rules or law at the time of the alleged breach or offence. However, if the rule or law has changed meanwhile, an enforcement action or prosecution is less likely in practice.

Other wonders

  • Will there be any effect on taxation and double taxation agreements (maybe unlikely)?
  • What will be the effect on data protection legislation, EU General Data Protection Regulation and equivalence?

SIRG Group of Compliance Officers
28 June 2016

Opinions expressed in this article are personal to the writer so should not be interpreted as being those of the CISI or anyone else.

Published: 30 Jun 2016
  • Capital Markets & Corporate Finance
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