With Brexit upon us, what are the implications for MiFID II if voters decide that the UK should leave the European Union?
There are a number of reasons why Brexit would not delay the MiFID II implementation date beyond January 2018, even in the instance of Brexit.
If Brexit goes ahead, the EU treaties will allow for a two year period within which the UK has to renegotiate its relationship with the European Union across all parts of the EU single market, including financial services. On the current timescale, MiFID II will have been implemented by that time; and the financial services sector, to continue doing business in the EU after a Brexit, will need “equivalency” so that UK firms can continue doing business in the EU. This can be achieved by implementing MiFID II.
The UK political and regulatory regime still stands for the principles and objectives that the EU legislation was designed for and addressed better management controls; safer trading, better understanding of customers and the public and greater transparency. Any potential UK exit from the EU would require at least a formal two year negotiation process where the national member states and the parliament will have to approve the final terms and conditions.
Unless the UK is planning on pursuing a derivative of Lord Palmerston’s “splendid isolation,” regulators will need to aim for “equivalency” in order for UK financial services to continue to be available on the continent. Norway and Switzerland would serve as potential models for what a UK post-Brexit would look like. Like Norway and Switzerland, UK firms that want to continue offering, distributing or marketing financial market services or products within the EU will either have to set up a branch in the EU (Ireland?) or hope that UK laws will be declared “equivalent” for MiFID II compliance. As we have seen in the case of U.S. clearing equivalence and other “third country” equivalence issues, the procedure for the EU recognising equivalency can be a politically charged process.
It can also be used to create competitive advantages. This is another reason why in our opinion, MiFID II, even after a Brexit, will be adopted in the UK with at most minimal deviation from EU interpretation, in order to reduce any potential friction from being granted EU equivalency. With or without Brexit, MiFID II will still be a signature piece of UK regulation – the directive provisions having being incorporated into the UK Statute Book and the regulation having direct effect. From a recruitment point of view we still expect the banks to increase headcount in order to meet the demands of the regulation.