The Markets in Financial Instruments Directive (Mifid) was applied in the UK from November 2007 and aimed to integrate the EU’s financial markets and stimulate cross-border investment. Further amendments to this, known as Mifid II, must be adapted by EU members in domestic laws by 3 July 2016.
Michael McLintock, independent financial adviser at Adelp Financial Solutions in Lanark, says these regulations could be tailored if the UK were to leave. “It’s more likely to be adapted than disappear altogether,” he says. “The good thing is that it might be more adapted to the way British financial services work rather than being a broad-brush approach across the whole continent.”
According to Dean Mullaly, managing director at London-based Mark Dean Wealth Management, UK advisers could lose passporting rights and have to apply to each individual country where they wanted to give advice. He adds the terms of exit are also more complicated than a clean severance. “We wouldn’t actually get a seat at the negotiating table for how we pull out,” he says. “That would all be done by Europe, so the old saying ‘keep your friends close but keep your enemies closer’ – it’s a bit like that.”
For non-Ucits investments such as hedge funds, the Alternative Investment Fund Managers Directive (AIFMD), ensures that a single fund manager is responsible for compliance. This contains an anti-letterbox provision, which prevents an Alternative Investment Fund Manager (AIFM) from delegating investment management functions to an extent that exceeds “by a substantial margin” those it retains. Therefore it can no longer be considered to be the manager of the alternative investment fund. Mr Smith does not see this as an issue for buying European investments, but the cost of passporting into these regimes is likely to increase. “It’s got to be more than just a letterbox on the Boulevard Royale,” he says.
The future of UK financial services would be hugely uncertain in the event of a vote to leave. According to research by Rathbones, between 2010 and 2014, financial services dominated the UK’s inward investment flows. They represent 27 per cent of the total stock of foreign investment and 42 per cent of the inward flow over the past five years. The next highest source, ‘professional, scientific and technical services’, generated only 16 per cent.
Mr Smith says because of this, the financial services industry is rife with risks that would increase by leaving. “It does seem to be more and more difficult to do business in Europe from outside of its borders and [this] is only likely to intensify.” However, he adds that this may open up opportunities to transact business globally that could prove highly beneficial for the UK. “We have historic and currently good ties to Asian financial centres such as Shanghai and Hong-Kong,” he says. “If we are free to capitalise and strengthen those ties by being unshackled by the EU’s trade treaties, then the financial services industry could be better off.”