June 29, 2016

UK Referendum: Impact of ‘Brexit’ on UK/EU Financial Services

Following last Thursday’s referendum vote in the UK to leave the European Union, there has been considerable speculation as to what the UK’s future trading relationship with the EU will be like, in particular in relation to financial services. Although it is true that nobody really knows now, not least because it will all be subject to negotiation with the EU, an outline of what this may look like is fairly clear.

There are two substantive issues: the first relates to the rules faced by UK firms in undertaking domestic UK financial services business and whether these will be amended/repealed since the UK will no longer be subject to the underlying European legal requirements. This question arises only if the UK elects to cut its ties with the EU. If it elects to join the EEA (the Norway option), it will still be obliged to implement the directives in their entirety anyway but will not be able to participate in their formation (as many commentators have already observed).

The second relates to UK firms’ access to the EU markets and to EU clients. Although this will be subject to negotiation, the important financial services directives already contain third country provisions governing relations between the EU and third countries (i.e., countries that are not members of the EU).


This takes effect in January 2018, and it is almost inconceivable that the UK shall have left the EU by then. UK firms will therefore be required to implement all the MiFID II changes as though no vote to leave had happened. The FCA confirmed this in a statement on 24 June.

The only question is whether the Treasury and Parliament will want to repeal this legislation after our departure. Presumably, this will be unlikely since firms will already have implemented the whole of the directive by then; further uncertainty and expense would be involved in unwinding it and then implementing further new rules. In addition, since the UK was fairly heavily involved in the work on MiFID II, it would seem odd for the UK to disavow it now.

On the second point, third country firms will be generally permitted to deal with professional clients and eligible counterparties in the EU provided that they are registered with the European Securities and Markets Authority (ESMA) under a new registration arrangement established under the relevant implementing regulation (MiFIR) and provided that the EU has formally concluded that the UK’s and the EU’s regulatory regimes are broadly equivalent under the new Article 47 equivalence regime. It is difficult to see that the two regimes would not be equivalent if the UK elects to retain the bulk of the MiFID II regime recently introduced.

The registration regime also appears straightforward and seems to be broadly comparable to a Companies House filing. Dealing with professional clients and eligible counterparties seems, therefore, to be reasonably straightforward.

The only substantive change is that UK firms will likely be unable to deal with retail clients (a term that includes not just true retail investors, but also most high net worth investors and small companies) in the EU. MiFID II confirms that member states may oblige third country firms to establish a branch in their country to deal with retail clients locally. It is expected that most member states will elect to do so since they already have general prohibitions on non-EU firms carrying on any business with local persons.


AIFMD may be a little different from MiFID II as the UK was never greatly enthused with this legislation. Notwithstanding this lack of enthusiasm, it is doubtful that much will change here either. There may be some tinkering at the edges with parts of it – for example, the remuneration rules and the third country fund registration/reporting but even this is doubtful.

Like MiFID II, the AIFMD contains a third country regime, but this is more detailed and restrictive. Subject to contrary advice from ESMA (which presumably, without the UK, it will be less likely now to give), the national private placement regimes that EU countries are currently operating to permit (or not permit in some countries such as Italy and France) third country managers to register and market funds to professional investors, will be switched off from 2018. At that point, a UK AIFM that wishes to market into the EU or manage an EU fund will need to obtain authorisation in the relevant EU country of reference and will need to comply with the full terms of the directive. (Presumably, though, UK AIFMs that do not wish to market into the EU may be able to operate without complying with the full directive.)

This will mean that UK AIFMs that want to attract EU investors will continue to be subject to the same AIFMD rules as currently.

Market Abuse

The new Market Abuse Regulation comes into effect in only a few days and will be old law by the time the UK leaves the EU. It is difficult to see how any of these provisions are likely to be repealed or even amended, partly because the UK authorities clearly want an effective market abuse regime and partly because it makes sense to have an identical regime to cover trading in securities listed in the UK and listed in EU countries.


It is difficult to imagine substantive changes to the EMIR regime as it applies, directly or indirectly, if either party is in the EU. In other words, it only doesn’t apply if both parties are outside the EU. For example, a relevant trade must be cleared through a clearing house if either party is based in the EU; and the portfolio reconciliation requirements can work only if both parties co-operate (even though the obligation may be placed only on the EU counterparty).

Capital Requirements/Solvency II

There have been many criticisms of the capital requirements applying to, in particular, European banks and insurance companies and that they restrict the business that they can undertake. As a non-member of the EU, the UK will have the flexibility to dilute these rules, but it should still be remembered that the UK will be a participant in the international bodies setting minimum standards and that low capital bases for firms are not necessarily a good idea (as 2008 showed).

The Future

On the above analysis, there is unlikely to be any significant change to UK financial services regulation anytime soon, either because the UK needs to continue applying the European rules in order to access the EU market (the AIFMD), because the UK was a significant contributor to the legislation in the first place and so is likely to continue supporting many of the measures (MiFID II) or because firms will be used to the legislation by the time of our departure and so why rock the boat again (MAR, EMIR)?

Even if there is a desire to have a bonfire of regulation after the UK leaves, the government and the FCA will do this only following a long consultation process. Bearing in mind the plethora of other issues for the government in the meantime, this bonfire is unlikely to take place for several years.