Since the Brexit result, the focus for many has been on firms maintaining passporting rights under MiFID. Whilst this is undoubtedly the cornerstone of a firm’s ability to provide investment services throughout the EU, there are other regulatory considerations across the end-to-end provision of investment services.
MiFID II legislation regulates conduct, ensures supervisory oversight and is central to primary and secondary market activity. Assuming the UK retains European Economic Area (EEA) membership, passporting rights will be retained under MiFID but we will lose the ability to directly influence future EU legislation, despite being subject to it. Without EEA membership, we will become a third country under MiFID and current passporting rights will be lost.
MiFID II establishes two separate regimes for third countries doing business with EU entities:
- the ability only to do business with a retail client in a Member State, providing there is an established branch in that State
- the ability to do business with a professional client in a Member State if it is on the European Securities and Markets Authority’s register (no branch needs to be establish in the Member State). However, the EU would need to deem the UK’s regulatory regime equivalent
But what are the other regulatory considerations across the end-to-end provision of investment services?
- the Prospectus Directive (PD) allows banks to use one prospectus to offer securities in multiple EU jurisdictions. If negotiations cause a change to status quo, the UK will need to determine new domestic laws to address the PD regulation ceasing to have effect under UK law
- it is unlikely that the UK would deviate too far from the existing regime though as the principles have been set by the International Organisation of Securities Commissions (IOSCO), a global body of which the Financial Conduct Authority (FCA) is a member
Trading or Order Execution:
- for instruments subject to the trading obligations introduced through MiFID, UK entities will still need to trade on venue with EU counterparties given that counterparties will be mandated to do so
- whilst the UK has no obligation to enforce pre- and post-trade transparency requirements on firms trading OTC on own account, it is likely the quest for more general equivalence will create a largely similar environment in terms of pre-trade price availability
Trade reporting and clearing:
- EMIR reporting and clearing requirements would not apply post-Brexit, but as a G20 member, the UK will need to adhere to agreed principles underpinning EMIR, so UK-applicable obligations would continue
- EMIR will still apply to any UK banks EU-based counterparty, so not achieving equivalence means any trade transacted with an EU entity would still need to comply with certain requirements
- UK trading entities will need to maintain arrangements with central counterparties (CCPs), due to their counterparties requiring that eligible trades are cleared through an appropriate CCP
- the Alternative Investment Fund Managers Directive (AIFMD) and the Undertakings for Collective Investment in Transferable Securities Directive (UCITS) apply regulations to firms based in EU member states which, in return, are given passporting rights to rest of the EU
- assuming no special post-Brexit access agreements are made, the UK would be a ‘third country’ under these regulations, ceasing to benefit from AIFMD and UCITS passporting regimes. However, the UK’s existing EU-based laws should be fully equivalent to those of the EU and we would be well placed to take advantage of EU Gateway Hubs (e.g. Dublin and Luxembourg) that allow non-EU managers to provide services and concessions available to third countries, as many non-EU countries already do.
Our next blog will look at how Brexit might impact the provision of Retail and Commercial banking services