Financial Regulatory and Investment Management
- Notwithstanding the result of the referendum, the U.K. is and will continue to be, a member of the EU until either a negotiated withdrawal is completed, or, in the absence of an agreement, the two-year notice period provided for by Article 50 of the Treaty on the Functioning of the European Union has expired. That two-year notice period will begin only when the U.K., “in accordance with its own constitutional requirements,” provides formal notice to the European Council of its intention to leave the EU. Until the U.K. ceases to be a member of the EU, it continues to have the rights and obligations of a full member of the EU, which include the obligations to implement and give effect to the EU’s financial services directives and regulations and the associated rights, including the right for U.K. authorized firms to access the EU single market by the exercise of “passport rights.”
- The eventual impact of Brexit on a financial services business will depend on the nature of that business, the extent that it relies on EU passport rights and, in particular, the exact terms of the U.K.’s departure from the EU.
- A “hard-Brexit” implies that the U.K. would leave the EU without having reached any, or any substantive, agreement with the EU as to its future relationship. A “soft-Brexit” implies that the U.K. would leave the EU, but would remain a member of the wider European Economic Area (EEA) (or an equivalent arrangement) and would continue to have access to the European single market. It is, of course, possible (perhaps likely) that some form of compromise between soft- and hard-Brexit will ultimately be reached.
- In a soft-Brexit, we anticipate that the U.K. would continue to participate in the single market in financial services and would fully implement the EU’s financial services legislative agenda, and that U.K. firms would continue to be entitled to access the EU markets on a passported basis (and likewise, firms from other EU member states could continue to access the United Kingdom market on a passported basis). Accordingly, a soft-Brexit would likely have minimal effect on the regulatory status or operations of financial services businesses. However, the United Kingdom would (almost) inevitably lose the right to participate in the EU legislative process, and the U.K. would lose the ability to influence and drive the financial services agenda within the EU, which may be perceived as negative for the financial services industry as a whole. (An alternative argument is that the EU’s post-2008 reform of the regulatory framework is largely complete; that this framework was substantially supported and driven by the U, and, to the extent that there are any further changes, the United Kingdom would be able to exercise influence through supranational bodies, including the G20, IOSCO and Basle; and that the U.K.. would not have to implement any measures that it considered harmful to its financial services industry).
- A hard-Brexit would be likely to have a significant impact (for good or bad) on financial services firms that do business in the U.K. and the wider EU. However, it is likely that many U.K. financial services firms (particularly those authorized pursuant to MiFID) would be able to continue to access EU investors and markets.
- The U.K.’s current legislative framework for financial services (including banking, insurance, investment management and market infrastructure) is substantially derived from EU law, either in the form of U.K. law giving effect to EU directives or, increasingly, the use of EU regulations with direct effect in the U.K. The financial services industry would want to ensure, in a hard-Brexit scenario, that the government had determined how to implement a new financial services legislative framework within the U.K. and, as a matter of policy, whether and to what extent that should involve incorporating EU financial services legislation into U.K. law.
- The impact of a hard-Brexit on a financial services basis will depend on the nature of the business (for example, whether it is a bank, insurance company or, in the asset management and brokerage industries, a MiFID, AIFMD or UCITS authorized firm).
- For example, both the fund and manager of a UCITS must be domiciled in an EU member state. Accordingly, the U.K.-domiciled manager of a Luxembourg- or Irish-domiciled UCITS fund would have to consider whether to redomicile itself (the manager) in an EU member state. An alternative solution, however, may be to adopt the model used by a number of U.S. managers—to act as the sub-manager to a selfmanaged EU UCITS. This would enable a U.K. manager to continue to run a UCITS fund and the fund to be distributed across the EU on the basis of the existing UCITS passport.
- Similarly, a U.K. manager authorized under AIFMD would, in a hard-Brexit scenario, lose the right to market its EU-domiciled funds to EU investors on a passported basis. However, a U.K. manager that manages non-EU funds (as is far more common) would continue to be able to market its funds to EU investors on a private-placement basis in the same way that it does today. The AIFMD contemplates the national private-placement regimes being phased out by July 2018 (which may well coincide with a hard-Brexit) and replaced with a passport for non-EU firms (subject to those non-EU firms being authorized pursuant to the directive). However—although this, of course, may now change—to date, there has been little appetite within EU member states to phase out private placement and activate the non-EU passport.
- U.K. firms authorized pursuant to MiFID (including, in many cases, the U.K. subsidiaries of the United States and other non-EU countries) may continue to be able to exercise their passport rights (to the extent that this is necessary for them). In January 2018, MiFID will be revised to incorporate a passport for “third-country firms” that are subject to equivalent regulatory regimes. Although the determination of equivalence is within the gift of the European Commission, the only reason for withholding that determination, given that U.K. law will not just be equivalent to but the same as EU law, will be political.
- In a hard-Brexit scenario, U.K. firms executing transactions in EU-listed securities will (like all EU and non-EU market participants) continue to be subject to the EU’s rules on market conduct, including the Market Abuse Regulation and the Short Selling Regulation. However, it may become more difficult (but not impossible) for EU regulators to exert jurisdiction and to take enforcement actions against U.K. firms.
- The partners of Akin Gump Strauss Hauer & Feld’s UK/EU investment management and financial regulatory teams recently held a conference call on which they discussed the immediate ramifications of the referendum and provided a round-up of the constitutional, legal, market and regulatory announcements made in the hours following the announcement of the result. Please click here to listen.
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