Brexit: The implications of the vote to leave on the UK’s financial services industry?

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For UK firms with a purely UK focus, it is unlikely that the results of the EU referendum will have much of an impact. The extent to which that can be said of firms carrying on business in EU Member States will depend on the post Brexit model that the UK Government decides to adopt. At the moment we do not know what model that will be so, for now, firms have to wait and see, a frustrating and worrying position, but matters will eventually start to become clearer than they are today. One point that is worth bearing in mind is that the financial services is a sector that is highly regulated the world over – not just in the EU and UK. Whilst some regulations may fall away or change, we can be pretty confident that, post Brexit, there will still be a good deal of regulation to contend with.

Financial services

Under the current regime, a UK investment firm authorised under an EU directive has a ‘passporting’ right to carry on business in any EU Member State, irrespective of whether or not it has a branch in that state, so long as it has a base in the UK. US and Swiss banks are also able to make use of the passporting right from their branches or subsidiaries in London to carry on business in the EU.

Should the UK leave the European Economic Area (EEA), the passporting right will be lost unless some sort of special arrangement can be negotiated. There are political sensitivities around whether the UK stays in the EEA or not, but the importance of the financial services sector to the UK economy and the importance of the passporting right to the financial sector will weigh heavily in the argument that is to come.

The loss of the passporting right would leave UK firms with restricted access only. Firms would have to consider relocating part of their UK operations to the EU or setting up EU subsidiaries.

UK amendments to the existing EU legislation which forms the basis of the UK’s financial services regime would be probable; a complete rewrite would not be. Some EU-based legislation of recent vintage, MiFID II for example, which has been/is being costly to implement, would almost certainly remain, at least in the short to medium term. In any event, if UK firms want to continue to do business with the EU, they will need to comply with EU law (although the UK Government will in future have no say in shaping these). In due course, one would expect UK law and EU law to begin to diverge and compliance managers of firms that trade in Europe will need to be familiar with parallel regimes. But that is for the future.

Existing contracts should be reviewed to see whether they contain obligations to comply with EU law. Compliance with any such provision may become impracticable when UK leaves.

Capital markets

The UK has already implemented the Prospectus Directive and the Transparency Directive and the Market Abuse Regulation (the MAR) will become law on 3 July this year. If the UK Government wants the London Stock Exchange to maintain its reputation as a major international trading platform it is likely that the key provisions of these directives and the MAR will have to remain a part of English law. As a Regulation, the MAR will cease to have effect upon Brexit so legislation would be required for its provisions to continue to have effect. Historically, the UK has exceeded EU requirements in its insider dealing legislation, in order to ensure investor confidence, so it seems inconceivable that the MAR will not be adopted in substantially similar form to the form it currently bears.

An EU exit may result in the loss, in whole or in part, of the UK’s ability to participate in mutual recognition between Member States with regard to prospectuses and announcements. Where an issuer is based outside the EU, Member States have the power to approve a non-EU prospectus if it is drawn up in accordance with international standards that are equivalent to the requirements set out in the Prospectus Directive. The Commission has the power to decide whether a third-country’s laws and practices (in this case, the UK would be the third country) satisfy the equivalence test. The UK will no doubt seek to convince the Commission that it satisfies this test.