On 23rd June 2016, the UK voted to leave the European Union by a majority of 52% to 48%, in what has been termed, “Brexit”.
The UK Government has not yet triggered Article 50, the provision in an EU Treaty which sets out the procedures for how a country leaves the EU and begins the process of exit negotiations. The EU has refused to enter into informal negotiations prior to this, arguing “no notification, no negotiation”.
However, the Prime Minister, Theresa May, has announced that she will trigger Article 50 before the end of March 2017, meaning that the UK will leave the EU by spring 2019. She also intends to incorporate all existing EU legislation into UK law through a “great repeal bill” to ensure continuity. Negotiations with the EU to establish what the relationship between the bloc and the UK will look like are, as stated above, yet to begin. As such the long-term impact on financial regulation and capital markets is yet to be realised.
Market Structure Partners is following developments closely and we outline some key points below:
- What happens to regulation currently underway such as MiFID II?
- What are the options for implementing Brexit?
- What is the likely impact of Brexit for the UK financial markets?
UK issues letter triggering Article 50 to EU to begin the two years of talks.
Parliament passes a bill introduced in January into law, enabling the Government to legally start the Brexit process.
House of Commons votes to back the triggering of Article 50 by the end of March 2018, as required by a High Court ruling in November.
Theresa May faces all EU leaders for the first time at a meeting of the European Council. The EU did not respond to May’s limited comments.
Conservative Party conference. PM Theresa May announces the intention to trigger Article 50 in March 2017, with the UK leaving the EU by spring 2019.
The Council of the EU is informed that the UK will not assume it’s 6 month presidency of the Council in the second half of 2017 in light of the referendum result.
Government lawyers have told the high court at a hearing for the legal challenge that Article 50 will not be triggered this year.
The resignation of Lord Hill from the European Commission as a direct result of the referendum result takes effect. He was previously Commissioner with the important Financial Services portfolio. Whilst the UK is still a member of the EU it must have representation of a Commissioner, but the portfolio they will be assigned remains to be seen.
Theresa May is officially appointed Prime Minster by Queen Elizabeth II.
The new Cabinet is announced, featuring a new Chancellor of the Exchequer (finance minister) and newly created roles in light of the vote to leave the EU: Secretary of State for Exiting the European Union (“Brexit minister”) and Secretary of State for International Trade.
Theresa May is appointed the new Conservative Party leader following the knockout or withdrawal of all other candidates from the leadership contest. This resulted in David Cameron resigning much earlier than the expected date of 9th September following a full leadership contest.
A high court order is sent to the government for a response to the legal challenge which is made up of several individual cases.
A legal challenge begins to question the legality of the Prime Minister assuming responsibility to invoke Article 50. The challenge asserts that an act of Parliament took the UK into the European Economic Community in 1972 with the European Communities Act, and it must therefore be Parliament that votes to leave by repealing that Act and making the decision to invoke Article 50. The key arguments are that the referendum was only advisory, and ultimately the sovereignty of Parliament should be enforced regardless of political outcome.
The UK’s Commissioner in the European Commission resigns with effect from the 15th July. Lord Hill had responsibility for financial services.
Result to leave by 52% to 48% is declared. The resignation of the Prime Minister David Cameron sparks a leadership contest for the ruling Conservative Party.
The EU referendum is held in the UK asking voters whether the UK should remain in or leave the EU.
What happens to regulation currently underway such as MiFID II?
The UK regulator, the Financial Conduct Authority (FCA), has made it clear to the firms it regulates that they must continue to both comply with relevant EU laws and to continue to prepare for legislation that is currently being adopted.
The UK is extremely unlikely to have exited the EU prior to September 2018 at the earliest, at which point MiFID II should already be in force – The UK must transpose MiFID II into national law by 3rd July 2017. MiFID II is already very far along and it would be harder for all involved to stop implementation than to keep it moving forward.
What are the options for implementing Brexit?
Following the UK’s ruling Conservative Party leadership contest, the new Prime Minister will realistically have three options through which to implement Brexit:
- Option 1: To remain in the single market, “the European Economic Area”, in a Norwegian style deal. Under this option the UK would have to make a significant contribution to the EU budget and observe all single market regulations but have no say in making them. Under this scenario all the current legislative arrangements will remain unchanged.
- Option 2: To exit the EU and the single market with grandfathering of existing rights. European laws made prior to this date would continue in effect. This is the most likely way that Brexit, if it involves leaving the single market, will be being managed, and the FCA has already indicated that it favours this approach if the UK leaves the single market. This approach will be simpler and will likely lead to less uncertainty than Option 3.
- Option 3: To exit the EU and completely repeal EU laws and create a new legislative programme. This would result in all European laws, including those made prior to the date of exit being invalid and of no further effect. New UK legislation would be required to fill gaps in law but some of that will fall to the regional Parliaments and Assemblies in Scotland, Wales and Northern Ireland. This is the most complicated and least practical solution.
Of the various options available to the UK (discussed below) as it exits the EU, the most practical ones, and those most immediately favourable for financial markets, are to maintain all currently adopted EU legislation.
What is the likely impact of Brexit for the UK financial markets?
What appears to be certain is that in all Brexit scenarios, the UK will lose its current influence in moderating or improving development of future EU legislation:
- For example under the creation of MiFID II, the UK moderated what it considered to be extreme views from other EU countries on areas such as high frequency trading and finding a balance to transparency of trading in all asset classes.
- Equally the UK pushed topics on its own agenda such as unbundling of research and more competition in clearing.
The critical question that needs to be answered is whether UK financial market participants will have the ability to continue business passporting across Europe (where a firm in the UK can freely sell services into other EU countries without having to set up an entire business within each EU country).
If passporting is not a possibility then many global firms with European headquarters in London are likely to move into EU jurisdictions and take their managed funds and financing with them. The UK is likely to lose investment, financing and influence in the EU as a result, and may still have to make concessions in order to gain equivalence with EU regimes. Any rules the UK sets alone may have less influence both in the EU and globally because less is business is being regionally head-quartered there.
We are also yet to see what Brexit means for:
- the future of the substantial Euro-denominated clearing business in UK clearing houses;
- the role of ESMA continue in the UK in conducting central regulatory oversight as required in MiFID II, EMIR etc;
- how the UK will enforce regulations that are currently adopted as law but yet to enter into force.
Sourced from European Parliament and European websites, financial and national newspapers and market practitioners.
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