Timeline

What happens to regulation currently underway such as MiFID II?

The UK regulator, the Financial Conduct Authority (FCA), has made it clear to the firms it regulates that they must continue to both comply with relevant EU laws and to continue to prepare for legislation that is currently being adopted.

The UK did not exit the EU prior to September 2018, at which point MiFID II is already in force – The UK had to transpose MiFID II into national law by 3rd July 2017.

What are the options for implementing Brexit?

Following the UK’s ruling Conservative Party leadership contest, the new Prime Minister will realistically have three options through which to implement Brexit:

• Option 1: To remain in the single market, “the European Economic Area”, in a Norwegian style deal. Under this option the UK would have to make a significant contribution to the EU budget and observe all single market regulations but have no say in making them. Under this scenario all the current legislative arrangements will remain unchanged.
• Option 2: To exit the EU and the single market with grandfathering of existing rights. European laws made prior to this date would continue in effect. This is the most likely way that Brexit, if it involves leaving the single market, will be being managed, and the FCA has already indicated that it favours this approach if the UK leaves the single market. This approach will be simpler and will likely lead to less uncertainty than Option 3.
• Option 3: To exit the EU and completely repeal EU laws and create a new legislative programme. This would result in all European laws, including those made prior to the date of exit being invalid and of no further effect. New UK legislation would be required to fill gaps in law but some of that will fall to the regional Parliaments and Assemblies in Scotland, Wales and Northern Ireland. This is the most complicated and least practical solution.

Of the various options available to the UK (discussed below) as it exits the EU, the most practical ones, and those most immediately favourable for financial markets, are to maintain all currently adopted EU legislation.

What is the likely impact of Brexit for the UK financial markets?

What appears to be certain is that in all Brexit scenarios, the UK will lose its current influence in moderating or improving development of future EU legislation:

• For example under the creation of MiFID II, the UK moderated what it considered to be extreme views from other EU countries on areas such as high frequency trading and finding a balance to transparency of trading in all asset classes.
• Equally the UK pushed topics on its own agenda such as unbundling of research and more competition in clearing.

The critical question that needs to be answered is whether UK financial market participants will have the ability to continue business passporting across Europe (where a firm in the UK can freely sell services into other EU countries without having to set up an entire business within each EU country).

If passporting is not a possibility then many global firms with European headquarters in London are likely to move into EU jurisdictions and take their managed funds and financing with them. The UK is likely to lose investment, financing and influence in the EU as a result, and may still have to make concessions in order to gain equivalence with EU regimes. Any rules the UK sets alone may have less influence both in the EU and globally because less is business is being regionally head-quartered there.

We are also yet to see what Brexit means for:

• the future of the substantial Euro-denominated clearing business in UK clearing houses;
• the role of ESMA continue in the UK in conducting central regulatory oversight as required in MiFID II, EMIR etc;
• how the UK will enforce regulations that are currently adopted as law but yet to enter into force.