June 29 2016
In the wake of the UK voting to leave the European Union, firms may now feel unclear as to whether the incoming MiFID II regulations will continue to apply to their businesses or not. With many firms already unsure of their obligations under the Directive, there is a danger that Brexit could compound the problems caused by a general lack of engagement with MiFID II and lead to complacency throughout the industry. But the FCA has released a statement which makes the facts very clear: MiFID II will still apply in the UK and firms must continue with implementation plans for the incoming legislation.
Let’s examine why:
In order to begin the process of formally leaving the EU, the UK government must first trigger Article 50 of the Treaty of Lisbon, which is not expected to happen quickly and may not happen until late 2016 at the earliest. When Article 50 is eventually triggered, the UK will then have a further two years to renegotiate its position with European Union Member States and establish new agreements. During this period, the UK must continue to obey EU treaties and laws, including MiFID II – although it will have no further say in decision making.
On Friday 24th June, the financial regulatory body in the UK, the FCA, released a statement confirming 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*.”
Preparations for MiFID II are already well advanced and the UK is firmly committed to meeting the January 2018 implementation date for the Directive – which will come into effect well before the UK formally leaves the EU.
MiFID II’s ‘third country’ provisions.
In effect, the reach of MiFID II regulations actually extends beyond the borders of the European Union. As well as regulating Member States, MiFID II also makes provisions for ‘third countries’. MiFID II defines third countries as those countries based outside the European Union - soon to include the UK - that wish to do business within the EU. Trading with entities based in EU Member States will only be possible for third countries if they have regulatory systems in place that can be demonstrated to be equivalent to MiFID II. It is therefore reasonable to assume that the UK will take all necessary steps to ensure that MiFID II equivalence is maintained post-Brexit.
In addition to its statement released on 24th June, which reiterated the obligations of UK firms under EU law, the FCA has also confirmed that it shares an ongoing agenda of reform that is consistent with the European Directive. All of this means that a deviation from the regulatory path mapped out by MiFID II is highly unlikely.
Included within MiFID II are provisions that, in tandem with the European Market Infrastructure Regulation (EMIR), are intended to address the G20’s commitment to reform the derivatives market in the wake of the financial crisis of 2008. As a member of the G20, the UK dismissed tackling these reforms in isolation, choosing instead to adopt a European-wide policy – a decision which it is highly likely to uphold post-Brexit.
The decision for the UK to leave the EU has already had a significant impact on global financial markets and there is little doubt that the effects of Brexit will continue to be felt for some time before the markets finally settle down. However, firms should not see Brexit as a reason to deviate from their plans to meet their regulatory obligations under MiFID II - with the clock ticking, positive engagement with the Directive is now more important than ever. Firms should regroup without delay and focus their efforts; to ensure that they are compliant and ready to continue business-as-usual with a redefined European Union.
*The full FCA statement on the European Union referendum result can be read on the FCA website here.