Summary and implications
In the immediate aftermath of the Brexit vote, we published a briefing on the implications of the result. This briefing focuses on the implications for financial services, a key part of the UK's economy.
We argued a few weeks back that the future regulatory landscape for UK financial services, at least as far as the detail goes, depends enormously on the nature of the broader Brexit deal that the UK manages to negotiate (touch wood) with its erstwhile EU colleagues. Although this uncertainty now exists following the result, we think even at this stage there are some things worth remembering as you plan for a currently unclear future. We have set out five of these below.
1. Financial services regulation was not invented entirely by the EU
Whilst it is clear that many aspects of the UK's financial services regulatory regime are based on European law, some of it also follows global policy agreed in the wake of the financial crisis by the G20, the Financial Stability Board and IOSCO. It is also worth remembering that some of the more controversial regulation has been driven by the UK, not the EU. Examples include the ban on inducements, ring-fencing of retail and investment banks, the bank levy and adviser charging rules. Given the influence of the UK in shaping the EU's financial services regulation, most recently via the very active Lord Hill as EU Commissioner for Financial Services, it is also conceivable that an independent UK might have implemented similar rules in certain areas even if it had not been part of the EU.
2. Bad law is better than no law
Nevertheless, the extent to which financial services in this country are regulated by EU legislation is huge. This is demonstrated by the veritable alphabet soup of regulatory regimes that are very familiar to us and our clients – AIFMD, CRD, EMIR, MAD, MiFID, PSD2, UCITS... we could go on. However, the very ubiquity of EU rules means that they are likely to remain largely in place in the near to medium term. It may even be sensible for the UK to transpose EU Regulations directly into UK law, at least during a transitional period (Regulations have direct effect and apply automatically in the UK on adoption by the EU, whereas Directives must be implemented into national law by Member States themselves). The confusion of no law is much more damaging than the certainty of unpopular law. In any case, EU regulation will continue to apply in full for a minimum of two years, until a formal exit is agreement is reached.
3. Divergence may come, but it will be gradual
Even so, the FCA has had its differences with EU regulation. It has been known to go further than European regulators at times, in some cases "gold-plating" the application of EU rules in the UK. For example, the EU's telephone recording obligations under MiFID II are to a great extent an exercise in the EU catching up to where the FCA is already. In other areas the UK regulator has been more liberal than other Member States. In the AIFMD context for example, the FCA has taken a more practical approach than other Member States when applying new rules on remuneration, granting authorisations and the defining what constitutes the "marketing" of Alternative Investment Funds.
So, whilst the UK may wish over time to implement rules that differ in places to those within the EU, there are a number of reasons why any such divergence is likely to be gradual:
- The task of replacing multiple regimes would be huge and take a very long time, both for regulators and for firms who have invested heavily in complying with current regimes.
- For the most part, despite some grumbling, EU financial services rules have been accepted in the UK (except perhaps in certain parts of the hedge fund and brokering industries, there is no deep feeling of resentment akin to the public outcry against the famous, egregious, fictional banana regulations).
- The uncertainty around a wholesale re-working from a blank canvass would be unacceptable.
- There will be a lot of pressure to negotiate as much access for UK service providers to the EU's Single Market as possible, which depends on the UK's regime passing the "equivalence test". This in practice means the UK continuing to comply with EU standards (it is worth remembering that even the US, birthplace of private equity funds, recently failed this test in the AIFMD context).
4. We can help with the "known unknowns"
Donald Rumsfeld's famous line was over-used in the period leading up to the referendum (including by us), but it is clear that there are key questions to which the financial services industry would ideally needed answers sooner rather than later. These include:
- Passporting – will UK firms keep their various "passports" for business in the EU?
- AIFMD – will the UK receive a "third country" passport if required, and if so when?
- EMIR – where will clearing need to be carried out post-Brexit?
- MiFID II – should firms continue or call off preparations?
- UCITS – will firms need to set up a management company inside the reduced EU?
However, it would be very optimistic to expect definitive answers to these questions in the immediate future. Given the notoriously pedestrian pace of EU negotiations, and their tendency towards brinksmanship and eleventh hour deals, firms need to consider their options. One such option is whether EU authorisations should be sought sooner rather than later, regardless of the eventual Brexit terms. If access to European markets is business-critical, then such pre-emptive hedging strategies might be worth the premium. In any case, Nabarro can help you consider the options that are available and if necessary implement any contingency plans.
5. Crowdfunding is not yet regulated at EU level
The EU's Capital Markets Union is a work in progress, and certain important growth areas, notably crowdfunding, are not currently subject to any bespoke EU regulation. The UK's crowdfunding industry has grown to be the largest and most dynamic in Europe under mostly FCA oversight. Brexit may mean that the industry misses out on any move by the EU towards a cross-border framework, but this seems very distant and hypothetical anyway, given that the EU as recently as May 2016 decided that there was "no strong case for EU level policy intervention at this juncture". The impact of Brexit on UK crowdfunding is therefore likely to be confined to broader economic issues, rather than any increased regulatory uncertainty.
We will be following all the issues for financial services firms very closely and communicating developments and our thoughts in detail over the coming weeks, months and years. In the meantime, please get in touch if you would like to discuss the regulatory challenges or opportunities that these uncertain times present for your business.
Please also remember that financial services regulation was already evolving at a rapid pace – that is one certainty that Brexit will not change.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.