Brexit - Issues For MiFID firms

Investment firms currently face two key challenges: the first, planning for MiFID II and the second, planning the best way forward post Brexit.

What is the best way forward will vary because a diverse range of firms are caught within MiFID's scope (and prospectively within the wider scope of MiFID II); a MiFID firm is often part of a wider, international financial services business; and the nature of a firm's client base will influence the decision.

We set out below though some preliminary thoughts on some key topics to consider in relation to the post Brexit scenarios.

Post the "leave" vote on 23 June, UK asset managers, along with all other financial institutions and businesses in the UK, are now having to address the potential consequences for their businesses, and their products and services:

At first glance there might be an attraction to Brexit, because the UK could apply a regulatory brake to the never ending deluge of regulation from the EU Commission. On the other hand there seems to be much to lose, particularly if we cannot participate in the Single Market place, and with the potential for further UK business operations or product to move to other EU jurisdictions. Business as usual, initially

The FCA's statement on the European Union referendum issued on 24 June indicates what one might expect: in the short term, on a day to day basis, it should be business as usual:

"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.

Consumers' rights and protections, including any derived from EU legislation, are unaffected by the result of the referendum and will remain unchanged unless and until the Government changes the applicable legislation."

For MiFID firms, the main immediate challenge is planning for implementation of MiFID II in order to have the chance to meet the January 2018 implementation date. (See our MiFID II update providing our Level 2 and Level 3 text tracker. Our Level 1 text publication is also available on request.) The UK position for implementing MiFID II is now becoming clearer:- we now have the FCA's second Consultation Paper (CP 16/19) and the third one on conduct of business and product governance issues is expected soon.

However, this expectation of continuing to implement European legislation and carry on with business as normal will in all likelihood remain only a short term approach, pending developments on some of the considerations raised below.

Potential loss of the MiFID passport

Thinking ahead to how negotiations for Brexit might progress, the main focus for MiFID firms is of course on the issue of potential loss of the MiFID passport (and for those MiFID firms which have a wider range of business, possibly some product passports too).

Clearly there is interest in maintaining participation in the Single Market from most in the asset management sector - certainly those with established businesses utilising a MiFID passport (and possibly additional passports if, for example, in the UCITS space). However, whatever the wishes and needs of the asset management industry, if (as at present seems likely) the corollary of having access to the Single Market will be having to agree to continuation of the right for free movement of EU citizens, continued participation in a Single Market might not be an achievable outcome within the Brexit negotiations.

MiFID firms benefit from MiFID I and, prospectively, MiFID II passports. MiFID I already enables a wide range of businesses to passport on a branch or services basis throughout the EU for investment management and advisory services, and the scope of MiFID is to be widened with effect from 3 January 2018.

If and when the UK becomes a "third country", UK firms would have limited options. There are three main options:

keep outside the scope of MiFID

Assuming services currently come within the scope of MiFID, there is little scope for new ideas here.

Under Article 42 of MiFID there is a general exemption, which is applicable across the EU, allowing for provision of services at the exclusive initiative of the client in an EU Member State. However, whilst relying on arrangements like this may allow some degree of activity to be undertaken from the UK into Europe, this is not likely to provide a sound basis for operating a business.

establish a branch, utilising Article 39 of MiFID II

Article 39 of MiFID II allows each individual Member State to opt into a regime under which the Member State may require a third country firm that intends to provide

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