Food for thought on Brexit options

Food for thought on Brexit options

On 23 June 2016, the UK held its historic referendum concerning its future membership in the EU. The result of the referendum, announced in the early hours of 24 June, took many by surprise with the UK voting by 51.9 per cent to 48.1 per cent to leave the EU after more than 40 years of membership.

The general consensus following the referendum vote is that there is an element of a journey into the unknown. This is in part a consequence of the economic and market uncertainties resulting from the referendum vote, although the Chancellor, the Bank of England and other policymakers have sought to move quickly to reassure markets and provide a message of stability. In addition, the route to eventual Brexit and the shape of the UK’s post-Brexit relationship with the EU are both at a very early stage of evolution. Even the timing of the service of the Article 50 notice under the Treaty on the European Union, which triggers the two-year negotiation period for the UK’s withdrawal, remains the subject of considerable political speculation. Until the EU and UK have agreed the nature of their post-Brexit relationship, it will be very difficult to assess with any certainty the impact on the financial services sector.

In the meantime, from a legal and compliance perspective, life goes on as before the referendum vote. Nothing has changed nor will it change until at the earliest the end of the two-year period triggered by the Article 50 notification. To this end, the FCA made an announcement on 24 June 2016 to make it clear that: “Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.”

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So, for example, MiFID, the capital requirements directive IV, the capital requirements regulation and the European market infrastructure regulation are still, in effect, the same as before the referendum vote. The market abuse regulation that became applicable in all EU member states on 3 July 2016 also applies in the UK. UK firms can still passport under the EU single market directives.

The reference in the FCA’s announcement to future EU legislation is interesting, but should not come as a surprise. One suspects that MiFID II and MiFIR, which now apply from 3 January 2018, were very much in the regulator’s mind. It would be a mistake for firms to simply down tools on their MiFID II /MiFIR implementation projects thinking that the legislation will not apply. Firstly, there is every chance that MiFID II/MiFIR will come into effect while the UK is still negotiating its exit arrangements. Second, many of the provisions in MiFID II and MiFIR were part of the international regulatory reform agenda that the G20 pursued following the 2008 financial crisis. Third, should the UK have exited the EU by 3 January 2018, depending on what may be negotiated, access to the single market will still be desirable. At the very least such access, for those within the scope of MiFID II and MiFIR, could be via the third country regime set out in the EU legislation and the equivalence of the UK regulatory regime will be an important factor.