It’s no secret that many firms are struggling with progress on their MiFID II programmes. Many spent the first part of the year hoping for an implementation delay that never materialised. While British politicians favouring “Brexit” continue to extol the virtues of independence and a reduction in red tape, it seems clear that it would provide no respite for financial services firms that trade within the EEA. The issue is not well understood outside of Europe and during a recent visit to New York, I was surprised by the number of firms hoping that an EU exit might exempt their UK entities from compliance (or at least reduce its impact).
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The key factor to consider is the concept of ‘passporting’. Passporting allows UK firms to trade financial services within the EU without licensing in each country. Although the UK’s status post-exit would be negotiated, it is clear that – in line with other non-EU countries – the UK would become a ‘third party’ for most EU legislation including MIFID II. Either as a member of the European Economic Area (EEA) or the European Free Trade Association (EFTA), UK entities passporting regulated services into the EU would be required to comply with all relevant regulations under the principle of equivalency.
Historically, the UK has exercised a great deal of negotiating muscle in relation to financial services. Exit would remove any direct influence that UK stakeholders have over the regulatory direction of the EU (and by definition all aspects of equivalency) and it’s no secret that the intention of the EU is to drive harder reforms in the future. International firms that rely on UK entities to passport services into the EU would need to find alternate methods for lobbying the EU Commission on such matters as will the UK’s own firms. Furthermore, we should expect that the UK would be required to engage in the process of demonstrating equivalence of UK laws, surveillance and enforcement as well as the capabilities of our National Competent Authority (NCA) – the Financial Conduct Authority (FCA). This is a process of unknown duration and outcome.
The process of exit negotiation highlights a crucial timing issue. As it stands, EU treaties provide a two-year period during which the UK would negotiate the terms of its exit and future relationship with the EU/EEA. Since MiFID II is effective from 3rd January 2018 (and since some record keeping activity may have to commence in 2017), no firm can afford to risk non-compliance during the overlapping period, nor wait for new terms to be negotiated since these would most likely require full compliance in any case.
Put simply, there is no way out. If your activities fall within the scope of MiFID II as currently proposed, you will need to comply regardless of the referendum’s outcome. Time is running out!