Potential Financial Regulatory Impact of Brexit

In so far as the UK retains domestic regimes based on those in the EU, it is hoped (despite the lack of certainty on the timing for this) that the EU Commission will reach a conclusion of equivalence to EU requirements with respect to much of the UK financial services regime.​

Immediate Impacts

For now and at least the next two years, EU law will continue to apply in the UK and the UK government will continue to participate in EU law making. Therefore, the implementation of EU laws due to come into effect, such as Markets in Financial Instruments Directive II (MiFID II), will need to continue. What happens afterwards is not known at this point in time. This two-year period will only commence upon a notification by the government of the withdrawing member state.

Medium and Long-Term Impacts

Following the two years, it is unclear what the impact will be. A potential threat to financial services is the loss of various passport regimes. Membership of the EU, promotes legal and regulatory harmonisation across Member States. This means that financial service participants benefit from a “passport” whereby they are able to provide cross‑border services to clients and counterparties.

Third Party Equivalence

In the scenario where existing EU financial services legislation is maintained and in the absence of renegotiation of treaty arrangements or changes in existing financial services regulation, the UK could potentially adopt status as a third country under current EU rules. Third Party Regimes allow non‑EU firms access to the EU market under conditions typically relating to existing standards in the country in question that are deemed equivalent to that of the EU, for certain services and activities. By way of example, treatment of UK administered benchmarks in the EU would depend on whether the UK legal framework is deemed equivalent to those benchmarks falling under the Benchmarks Regulation.

Potential Structures

Currently there appears to be two known models, which the UK could potentially follow, in order to continue providing financial services in the EU (although other options could emerge, as and when the UK Government engages in negotiations with the EU):

1.      *EFTA + **EEA Membership (similar to the arrangement between Norway and EU); or

2.      EFTA membership + Alternative Free-Trade Arrangements such as bilateral agreements (similar to the current arrangement between Switzerland and the EU).

* European Free Trade Association (EFTA) membership requires negotiating additional trade agreements.

** European Economic Association (EEA) membership allows for single market

Under option 1, the UK would first need to accede to the EFTA Convention which would require approval by EFTA’s existing members. The UK would then need to accede to the EEA Agreement. This would require the agreement of both the EU and EU Member States as well as the EFTA countries. A resulting EEA membership would preserve numerous similarities to EU membership, including the single market legislation. The EEA-EFTA States do not hold direct influence over EU law‑making relating to financial services (they are able to participate in discussions but do not have the right to vote). As an example, Norway fully applies the freedom of movement for goods, services, people and capital within the EEA framework. This means that Norway is subject to financial regulation such as the MiFID rules.

Alternatively, under option 2, the UK after acceding to the EFTA Convention, could choose to negotiate a series of bilateral agreements (similar to Switzerland), reach a free trade agreement or fall back on World Trade Organisation membership. Under the EFTA, Switzerland has negotiated over 100 bilateral agreements with the EU, including an agreement allowing the free movement of persons. This means that Switzerland will have to ensure that its regulations guarantee the same protections and are of an equivalent nature to EU laws.

Conclusion

Ultimately, very little is clear at this stage and there is no certainty as to what approach would be adopted. As the list below highlights, most of the Regulations that affect the precious metals markets, MiFID II, Market Abuse Regulations, Benchmark Regulations will all continue to be implemented as per their scheduling

Additionally, other regulations, like Conflict Minerals, will continue to capture the UK, until told otherwise. Finally, the commitments under Basel III will continue to apply to the UK as and when appropriate, given Basel III is a global initiative and not just a EU initiative. The EU is simply leading the efforts on Basel III implementation, which will also apply to the UK, whether or not the UK is part of the EU.

Regulations and Status

• MiFID II: No change; full implementation January 2018
• MAD: Implemented
• Benchmarks: No change; full implementation January 2018
• Conflicts Minerals: No change; awaiting EU implementation date.
• REACH: No change; registration deadline 2018

Contact…

The LBMA will continue to monitor developments and send out communications accordingly. However, if you want a status update or any background information on any of the regulations highlighted, please contact Sakhila Mirza, General Counsel.

Disclaimer
This memorandum is intended for general information only, and is not intended to be and should not be relied upon as being legal, financial, investment tax, regulatory, business or other professional advice. While every effort has been taken to ensure that the information above is reliable, the LBMA and its employees shall not be liable for any action arising from or relating to the use of the above contents.

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