The specific implications of BREXIT for UK financial services regulation are obviously unclear at present.  Financial services firms are surrounded by a complex web of domestic and European policy, which cannot be dismantled or amended overnight. The UK will need to decide which existing European financial services legislation to keep on its own statute book, which to remove and whether to implement new legislation it has been restricted from doing so.

Some key issues to consider include:

  • UK financial services firms’ access to EU investors will be impacted:  The existing ability to passport (whereby UK-based firms can apply for a passport to establish a presence or carry out business in another EEA state) may well cease. Current branch arrangements may be permitted to continue through some sort of grandfathering provision- but not necessarily.  UK firms may have to get their European operations that are branches directly regulated by each individual national regulator. Firms need to think about which route would be most sensible in this instance- would it be more logical to service clients by setting up one mainland European entity and then passporting from that to the rest of Europe- for example?
  • Questions remain over distribution of funds cross border – AIFMD and UCITS are major pieces of legislation for the distribution of funds cross border.  Will the UK as a ‘third country’ under AIFMD mean that UK managers will be restricted to distributing their funds within the limitation of each country’s individual National Private Placement Regime (prior to the potential introduction of the third country passport).  BREXIT will fundamentally impact UK domiciled UCITS, as these may need to be EU domiciled to remain a UCITS, either self-managed or with a new EU-based ManCo appointed.  Otherwise, they could no longer be deemed to be a UCITS – leaving them unable to carry out business freely across the EU.
  • The UK would need to draft new laws to maintain the status quo.  A considerable amount of the existing legislation set out in EU regulations – including European Market Infrastructure Regulation (EMIR), Market Abuse Regulation (MAR) and Capital Requirement Regulation (CRR) – has not been transposed into UK law, meaning the UK government would need to draft new law to maintain the status quo.

However, despite the upheaval and uncertainty linked to a BREXIT, it should also be considered that UK regulators will have the opportunity to implement new legislation  The government will be able to draft new laws believed necessary for UK markets, which might have previously been prevented by ‘maximum harmonisation clauses’ set by the European Commission.

An interesting outcome of the UK departure could be the impact on future European financial services regulation – BREXIT could actually lead to more light touch EU regulation..  The UK is a strong proponent of financial regulation and often seems to take the risk adverse position.  If they are no longer sitting around the policy making table, will we see a shift in EU legislation to be more light touch?

Next steps

Financial services firms operate across European borders – whether it’s a UK firm with European customers, a pan-European group or non-EU firms with subsidiaries in the region. For all, BREXIT will have a material impact and management need to be aware of how their firm, services and clients could be impacted.

Firms need to start planning for the range of possible outcomes which could come their way. Business-critical decisions need to be taken and plans drawn up.

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