The looming Brexit – the withdrawal of the UK from the European Union – has prompted legal uncertainty regarding the implementation of pending EU financial regulations, among them MiFIR and MiFID II. In response to the EU referendum, the UK’s Financial Conduct Authority (FCA) has issued a statement reiterating that financial regulations derived from EU legislation “will remain applicable until any changes are made” by the British government and Parliament, and that firms must “continue with implementation plans for legislation that is still to come into effect.”
The process for exiting the EU was established in Article 50 of the Treaty of Lisbon. Before the UK can withdraw from the EU, the UK government must first formally notify the European Council of its intention to do so. European leaders have indicated that they will not engage in talks with British leaders until the UK has invoked Article 50. The process then provides a two-year period for the EU and the departing member to negotiate the terms and conditions of the withdrawal across a range of different sectors, including financial services. Since MiFID II’s regulations are set to come into force in January 2018 – well before the conclusion of any two-year negotiation period – many (if not all) of its regulations will be implemented before the UK legally withdraws from the EU.
It remains to be seen whether negotiations will provide the UK with continued access to the EU’s single market. If the UK does not retain access to the EU’s single market upon formal withdrawal, the UK will become a “third country” under MiFID (i.e., a non-EU member state). Under MiFID II, UK-based financial institutions (known as “third country firms”) registered with the European Securities and Markets Authority (ESMA) will be eligible to benefit from the current “passporting” regime if they satisfy certain conditions. This would permit UK-based third country firms to continue providing investment services and performing investment activities throughout the EU on a cross-border basis.
One of the conditions set forth in Article 47 of MiFIR holds that the European Commission must determine that a third country’s regulations have “equivalent effect” to those established in the EU. Assuming the UK fully implements MiFID II’s regulations (which is likely given the FCA’s involvement in crafting them), a determination of equivalence would seemingly be a foregone conclusion, since the regulations would be identical. Financial institutions domiciled in the UK and their counterparties should continue to update their compliance programs to ensure that MiFID II’s regulatory requirements are satisfied.