Following the UK’s referendum
we set out some basic questions for financial services firms.
The result of the referendum
vote means that the UK has immediately left the EU?
No. Following the referendum
result the UK needs to negotiate with the EU its withdrawal. In addition, it
also needs to negotiate at the same time its post exit arrangements with the EU
and other countries.
The procedure for negotiating
the UK’s withdrawal from the EU is set out in Article 50 of the Treaty on
European Union. This is the only lawful route available to withdraw from the
EU. The procedure under Article 50 has never been used before.
To invoke the Article 50
procedure the UK needs to notify the European Council of its intention. As to
when the UK will actually do this is open to debate. However, in his statement
on the referendum result, the Prime Minister stated that his successor should
be the person who makes the notification. The Prime Minister has said that in
his own view, the new leader of the Conservative Party (and therefore Prime
Minister) should be in place by October.
Once the Article 50
notification has been made the UK has a two year period in which to reach an
agreement with the EU. The two year period can be extended if all the Member
States within the EU agree.
The important point to note is
that until the UK leaves the EU it continues to be bound by EU legislation.
This includes any EU legislation that becomes applicable whilst the UK is
negotiating its exit arrangements.
Following the referendum vote,
UK firms don’t have the right to passport under EU Single Market Directives?
No. As mentioned above, the UK
still remains a member of the EU until it has exited under Article 50. UK firms
therefore continue to have passporting rights under the EU Single Market
Directives. These continue whilst the UK negotiates its exit.
One would expect that in any
exit negotiations, the UK will seek to keep passporting arrangements (maybe
through membership of the EEA) but until negotiations begin it is too early to
say what might happen.
If passporting rights lapse,
firms need to consider how their business model and group structures need to
change.
MiFID II / MiFIR won’t apply
in the UK?
Probably not. The date of
application of both MiFID II and MiFIR has recently been delayed by one year (3
January 2018). If the UK were to give notification under Article 50 in October
2016 and the following negotiations were to take the full two years (October
2018), the UK would be expected to apply MiFID II and MiFIR as from 3 January
2018.
It would be expected that when
the FCA comes to implement MiFID II and MiFIR into its Handbook it will take
into account the UK’s exit negotiations.
A great deal of
financial services legislation will be re-written following
the referendum
vote?
Probably not. Whilst the UK
could design its own system of financial regulation it is worth remembering
that it continues to be a member of a number of international standard setting
bodies such as the G20, the Basel Committee on Banking Supervision and the
Financial Stability Board (FSB).
For example,
in terms of over-the-counter derivatives the UK would need to follow the
G20/FSB standards on central clearing of derivatives and the margining of
non-centrally cleared derivatives. On bank capital requirements, the existing
requirements would probably continue to apply but with three caveats: (i) where
the Basel Accord is more liberal than EU rules (e.g. in the area of
remuneration) the UK could follow the Basel approach; (ii) as the Basel Accord
sets only minimum standards, the UK could still choose to impose higher
standards on UK authorised firms; and (iii) the UK could restrict the
application of the Basel rules to internationally active banks and apply a
lighter regime to small banks.
It is worth noting from a
banking perspective that the CRD IV does not contemplate at the moment a
framework for third country access. The need for an EU subsidiary that could
provide banking services into the remainder of Europe under the passport system
would become fundamentally important in that scenario.
Can a firm just bury its head
in the sand?
No. Firms will need time to
assess the implications of the vote. They will also need to keep an eye on how
events develop over the next 2 or so years. Boards will need to be
informed on the risks and opportunities arising from the vote and this will
involve conducting due diligence on business lines and risk mitigation
strategies. Long term strategic planning may also have to be reviewed taking
into account various strategies that involve the different types of post exit
arrangements that the UK may have (for example EEA membership or having a
series of bilateral agreements in place similar to Switzerland).
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