As noted by the FCA, in terms of immediacy, much UK regulation derived from EU legislation will remain applicable until changes are made by the UK Government and Parliament post-Brexit.
Having said this, Brexit will inevitably have an impact on in-train and future regulatory implementation. The longer-term impacts of the decision to leave the EU on the overall regulatory framework for the UK is dependent, in part, on the future relationship that the UK seeks with the EU. There has been much speculation over what form this will take, with some commentators referring to models such as the Norwegian EEA, the Swiss bilateral model or the Turkish Customs Union. In reality, the future proposition is largely unknown as it will depend on the outcome of negotiation with the EU, but in all likelihood, there will be a bespoke UK solution, not wholly aligned to any existing “EU-like” model.
In attempting to assess the regulatory impact of Brexit, we can work from the knowns and apply educated guesswork on the anticipated impacts to regulations already in-train. Here’s a quick synopsis of the expected impacts of Brexit on a number of key regulations.
4th EU AML Directive
With an official implementation timeframe for June 2017, the European Commission has requested all Member States to adopt the directive by the end of 2016. UK AML legislation is largely compliant with the requirements of the 4th EU AML Directive, so should not pose significant impact. There is unlikely to be any move to dilute the 4AMLD proposals, however, some of the more infrastructural elements may be affected, such as the creation of central registers for beneficial owners. There may also be changes to how the risk-based approach is applied in other EU countries, particularly with regard to the treatment of UK PEPs.
MiFID / MiFID II
The biggest impact of Brexit will be the loss of passporting rights. MiFID requires “third country firms” (outside the EU) to open a branch within EU borders. Many countries, e.g. Hong Kong, have been using a London-based subsidiary for this reason. One option would be to establish a subsidiary in a Member State to rely on passporting rules through the EU (MiFID I) or be recorded in an ESMA-held registry (MiFID II) if granted equivalency the European Commission. The above points are, of course, contingent on whether the UK exits the EEA as well as the EU.
Margin Requirements – Non Centrally Cleared Derivatives
Originally due for Phase 1 implementation by September 2016, this regulation has now been postponed until mid-2017. While this is a global initiative rather than EU-centric legislation, the UK may still seek to delay implementation and may no longer be bound by ESMA RTS. It is unclear whether or not the UK will have to comply with this regulation once they have notified their intention to leave the European Union.
Applicable to all Member States, EMIR will not apply to the UK (unless grandfathered) once the exit is complete. However, like the Margin Requirements, this is a G20 commitment, so the UK will still need to adopt principles underscoring the provisions of EMIR. Equivalency decisions relating to clearing, risk mitigation and reporting techniques will need to be assessed on exit and UK firms will need maintain arrangements with central counterparties. UK CCPs are likely to be treated as “third country CCPs” and will need to apply for “recognition” under EMIR in order to be able to continue. A more tangible implication involves the treatment of FC and NFC, which would transition to a “Third Country Entity (TCE)” status.
The GDPR comes into effect in May 2018. This regulation will no longer apply to the UK on exit (as regulations are not transposed into national legislation). That being said, owing to the extra-territorial reach of the GDPR, provisions will continue to apply to UK companies offering goods and services to EU citizens. There has been much scrutiny in recent months over transfers of data outside the European Union. As the UK national standards are at a comparable level to other EU countries, it is unlikely there will be a big effort in terms of equivalency and they will most likely be whitelisted for transfers outside the European Union. The data protection impacts may require changes to data access rules and controls for UK-based resources. Data protection equivalency rules for non-EU countries will need to be reviewed given that EU-specific rules will no longer apply.
Existing UCITs/Management Companies may be able to retain authorization and permissions within the UK market but will lose their passporting rights and could potentially transition to an AIF-style regulation, imposing restrictions on retail investors. UK-domiciled UCITs will need to be EU-domiciled and self-managed or managed by an EU management company. Key providers may need to change to remain compliant.
The passport is linked to the Fund Manager rather than the product. In reality, a UK AIFM will be most likely be treated similarly to a US-based AIFM. UK-based AIFMs will likely transition to a “Third Country Firm” (foregoing passporting rights) and will not have permission to market the AIF to investors within the EU, but will retain IM permissions.
While it may take up to two years to finalize the Brexit process after the UK serves notice to exit under Article 50 (expected to take place in October 2016 upon the appointment of a new Prime Minister), the UK is under EU pressure to execute a swift and coherent withdrawal procedure. Fenergo will continue to monitor the regulatory impact of Brexit on financial institutions.
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