To an increasing extent, UK financial services and capital markets regulation is driven by EU law. Where EU law has been made by way of directive, there will be implementing legislation in the UK that could continue to apply, subject to any amendments that may be necessary to acknowledge that the UK is no longer part of a wider EU legal or regulatory structure. Alternatively, the UK could diverge from the requirements of the relevant directive by amending that legislation.
However, much recent financial services law has been made by way of EU regulation which does not require implementing measures in order to be effective domestically (for example, the recent Capital Requirements Regulation, European Market Infrastructure Regulation, Market Abuse Regulation, and the Markets in Financial Instruments Regulation, which supplements MiFID II). If on leaving the EU the UK wishes to implement provisions equivalent to those in these regulations it would need to pass domestic legislation incorporating those regulations into UK law – again subject to such amendments as may be necessary to reflect the fact that the UK is not a member of the EU.
EU directives and regulations establish the prudential requirements to be met by most of the financial institutions in the UK. Consequently, the basis on which UK regulators determine what financial resources UK financial institutions must maintain is the same as that applied by other EU regulators for equivalent types of institution. The UK regulators would therefore need to determine to what extent UK financial institutions should continue to be subject to equivalent prudential requirements to their REU entities.
The passporting regimes under various EU directives enable financial institutions incorporated and authorised in an EU member state to offer their services to, or establish branches in, other EU member states, without requiring separate regulatory authorisations or licenses in those member states. The passporting regimes also enable fund managers to market to investors across the EU and allow capital market transactions to be carried out on a cross-border basis under the terms of a prospectus approved by the regulator in the home state of the issuer. The basis on which UK financial institutions and capital markets will be able to continue to operate across the REU – and vice versa – is a significant issue to be determined.
In the absence of alternative passporting or cross-border regimes, financial institutions should obtain advice on the legal and regulatory ‘perimeter’ in each EU state in which a financial institution wishes to perform – or continue to perform – business in order to identify what activities would trigger a local authorisation requirement.
