News & Analysis


Brexit Impact on UK Financial Services Industry

It’s not clear whether, when or how the UK will leave the EU and I’m (personally) hopeful that any exit agreement for the UK will have passport-type protections for the UK financial services industry;
This hope would disappear in the face of political horse-trading regarding immigration or a political determination to deprive London completely of being one of the EU’s financial centres and boost Frankfurt and / or Paris.  (NB: that’ll be an interesting discussion between the soon-to-have-elections Mrs Merkel and M. Hollande, both of whose contributions to the EU budget would go up if the UK leaves) This hope would disappear also if the full weight of CRD IV and whatever Regulatory Capital requirements and other restrictions it contains are not kept in force in the UK.
In the meantime, whatever you do, continue to expect MiFID2 in the UK (certainly the FCA is working on that basis).
There are a number of serious questions raised for the financial services industry in the UK, the US and elsewhere by last week’s UK referendum. Here, I deal with only two of them:
How is the UK’s withdrawal from the EU “Brexit” triggered. and What are the possible scenarios that could play out.
The UK prime minister, David Cameron MP, has stated that no further constitutional steps are required – it merely requires an executive decision by the prime minister (which would take the form of a formal notification under Article 50(1) of the Lisbon Treaty) to trigger the two year exit period. Such notification would be (so far as the Treaty is concerned) irrevocable. There is academic and legal support for that position.
However, one of the UK’s leading constitutional lawyers practicing, David Pannick (button…) QC believes that an Act of the UK Parliament would be required and this position has some (academic and constitutional legal) support.
Mr Pannick QC’s recent article in the Times Newspaper is behind a paywall.
The Government (and certainly a majority of the Leave campaign) might not agree with him; the People Have Spoken etc. etc., but if it is agreed that an Act of Parliament is required, the outcome is not certain.
Last figures available showed that a majority of UK MPs and MSPs (members of the Scottish Parliament) support(ed) ‘Remain’.
There is also the fact that the UK referendum last week was expressly ‘non-binding’.  This stands in contrast to the last referendum held in the UK (in 2010) regarding whether to move to a different voting system which was expressly ‘binding’.
The likelihood is that we will not find out what the Government (or its lawyers) think is the correct route until after the next prime minister is appointed (in October this year). We may not even find out then if the new prime minister decides to call a snap election and one or more parties run on a ‘remain in the EU’ platform (and win) – The People Have Spoken Again etc. etc.
In the short term, therefore, it is almost certain that Article 50 of the Lisbon Treaty will not be triggered and no amount of “we expect” pronouncements from the EU institutions will change this.
If / once the trigger is pulled, however, I’ll turn now to my (personal) thoughts on the possible impact on the UK financial services industry.
The impact will depend very largely on what deal (if any) the UK can agree with the EU. Article 50 of the Lisbon Treaty (according to one of the UK MEPs who helped draft it), is designed to put the EU in charge of any negotiations.
The limited two year period for negotiation will force the leaving country to agree terms because, in default of such agreement, the leaving country will just revert to WTO terms.  That would most likely be disastrous for the UK financial services industry primarily because the EU passport regime would disappear overnight. UK firms would be ‘3rd country firms’ (in the same way that US firms are, currently).
It may be that the UK can negotiate ‘equivalence’ for its regulated firms as part of the exit deal upfront.  After all, by then MiFID2 will be in force and (most likely) enshrined in UK domestic law and AIFMD is already part of UK domestic laws.
However… there are some points to remember:
Parts of CRR/CRD IV have never been popular in the UK.
Now Lord Hill no longer has the financial services brief at the EU Commission, some of the pragmatic decisions he made (viz. reg cap for prop firms) may be re-examined.
EMIR isn’t really overseen by the FCA, it is overseen by ESMA, which makes it difficult to implement in UK domestic law after Brexit.
MAR (due into force next Monday) is implemented in the UK by reference – those of you who have looked at the new FCA Handbook will have noted that in place of pages of the Handbook, there is now simply a “please see MAR”.
I do not see MAR as a particular problem, since all it would require is the FCA to flesh-out the provisions of MAR in its Handbook, in the way that it did under the outgoing MAD – the same can be said, roughly, for MiFIR.  EMIR and CRD IV are thornier problems.
As was obvious in the context of the German HFT law, being ‘equivalently regulated’ (i.e. subject to similar conduct rules) was not sufficient for non-German firms. What was important (to BaFin) was that non-German firms were subject to the same prudential requirements as German firms (i.e. full-scope CRD IV capital requirements).  If the UK decides not to continue with CRR/CRD IV, then there is (in my personal opinion) absolutely no likelihood of ‘equivalence’.
EMIR presents another set of problems, given ESMA’s central role.  It might be anathema to the UK to cede oversight / control / regulation of its industry to ESMA when the UK is no longer part of the EU.  But let’s assume for now that this can be solved.
The best (and most likely) outcome for which we can hope is that the UK ends up with a Norway-type arrangement.  Norway is part of the EEA – this means (broadly) that it is subject to EU laws but has no ‘seat at the table’ to determine what those laws are. It also means (crucially for the Leavers) that it is part of the free market for movement of people.  The Leave campaigners who promised to reduce EU and non-EU immigration would not be able to deliver on their promises in that case.
Over the last 24/36 hours, there have been noises (particularly from the French government) that “there are no red lines” in negotiations with the UK and that allowing the UK to restrict EU immigration is possible. What is unspoken (but clearly, in my mind, intended given what M. Hollande has been saying also about Euro-denominated clearing and access to the EU) is that there would be a quid pro quo that the UK’s financial services industry would not have a passport to the EU. Some are calling it ‘EEA minus‘ or ‘EEA-lite’.
There are, however, bargaining chips that the UK financial services industry has: the FCA is not as fussed about direct members of or those with DEA access to UK trading venues being authorised and regulated in the EU as, say, BaFin or the AMF.
The UK could continue its drive to be a Renminbi and Islamic Finance centre.  The UK could also make itself more attractive to investment by lowering corporate taxes etc.  Markus Ferber MEP, the German rapporteur for MiFID2, said yesterday clearly that any country which is not a member of the EU is not subject to the EU’s rules on ‘government subsidies’ or its tax information-sharing MOUs.
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