This article was written by Tamasin Little (partner) and Charlotte Collins (professional support lawyer)
In the wake of the referendum result, only those firms who have not been listening to the FCA can believe that there is the silver lining of not having to implement any more European financial services legislation. After the never-ending waves of post-financial crisis reform, firms might in particular have hoped to avoid the seismic MiFID II rewriting of almost all the rules relating to investment services and markets.
However, the FCA moved quickly to quash any such hopes and to emphasise that firms cannot simply scrap current implementation plans, by stating immediately after the announcement of the UK's vote to leave the EU:
"Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament.
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." (our emphasis)
In answer to questions raised at the FCA's annual public meeting on 19 July 2016 the FCA’s new Chief Executive, Andrew Bailey, elaborated on this to say that there were two reasons why implementation of MiFID II must continue. Not only is it a legal obligation but also "much of [the provisions of] MiFID II [are] things which we would want to have in UK legislation anyway". He also indicated that no change is expected to the FCA’s objectives and regulatory priorities, and there is not going to be a “bonfire of regulation”.
Therefore, the FCA’s view is very much that firms should continue as normal with their implementation plans. Effectively, the timing of MiFID II implementation makes this the only practical course of action to follow.
Negotiations regarding the UK's exit from the EU will not commence until Article 50 has been triggered, and the UK will then have up to two years to negotiate its exit (unless the remaining Member States unanimously agree to extend the negotiating period).
As it is expected that Article 50 will not be triggered until late 2016 or early 2017, MiFID II, which is due to apply from 3 January 2018, will almost certainly come into force well in advance of the UK ceasing to be a member of the EU. Firms will be required and expected to comply from that date, and so cannot afford to lose precious implementation time waiting for answers regarding the longer term position. In particular, firms whose regulatory permissions may need to be adjusted, or businesses that need to apply for authorisation for the first time under MiFID II, must keep planning ahead to ensure that they have the required permissions in time for commencement.
Given the FCA’s influence in shaping MiFID II, and the fact that in many areas the new rules align with UK policy, it is difficult to envisage the UK making vast changes to the regulatory framework imposed under MiFID II. Support for the substance of MiFID II has now been confirmed as the FCA's starting point for future regulation.
Added to that is the fact that MiFID II’s third country access provisions (which we shall address in our next alert) require a positive equivalence assessment. This too was highlighted by the FCA at its annual general meeting, with Andrew Bailey stressing the importance, not only at an EU level but also globally, of ensuring that equivalent regulatory standards apply in order to reach a satisfactory settlement on cross-border trade and service provision, particularly in the wholesale market where business is inherently cross-border.
Nevertheless, there is also a window over the next few weeks to talk to the Government and stress particular aspects of EU regulation, including aspects of MiFID II, which are regarded as detrimental to business, so that account can be taken of this in policy formation and the ensuing negotiations. Only those firms who have properly considered the impact on MiFID II on their business will be in a position to take advantage of that window.
Therefore, in our view firms need to be continuing with MiFID II implementation planning - or commencing it in the case of those who have held back - and we are aware that this is the prevalent industry view, as well as the view of the regulators. In our forthcoming series of MiFID II publications we shall guide you through some of the key changes to help you with your implementation planning, cutting through the complexity and providing practical insights as to how the changes may impact your business.
Please do get in touch with a member of the Financial Regulation team to discuss how we can assist you with MiFID II implementation.