HM Treasury has published a draft Brexit statutory instrument (SI) and an accompanying explanatory memorandum relating to the “onshoring” of the MiFID II Directive and MiFIR (collectively, MiFID II). The SI will ensure that the MiFID II regime continues to operate effectively and that investors are afforded the same level of protection in a post-Brexit landscape. The Treasury highlights that MiFID investment firms and market operators should also have regard to amendments made to the Financial Services and Markets Act 2000, Regulated Activities Order 2001 and Recognition Requirements for Investment Exchanges and Clearing Houses Regulations 2001, through separate statutory instruments, which will be published in due course.
The MiFID II statutory instrument:
- transfers the functions of ESAs to the FCA and / or the PRA;
- transfers the functions of the EU Commission to HM Treasury;
- enables HM Treasury to transfer the responsibility for making and amending binding technical standards under MiFID II to the FCA and the PRA;
- deletes certain provisions on information sharing and cooperation requirements between UK and EEA regulators;
- enables HM Treasury to take on the EU Commission's function of making equivalence decisions for third-country regimes. Where the Commission has made equivalence decisions before exit day, these will be incorporated into UK law;
- makes special provisions for EEA firms which intend to operate in the UK under the Temporary Permissions Regime (TPR) by introducing the possibility of “substituted compliance” in cases where not doing so could lead to conflicts of law (except where supervisory responsibility is normally reserved for a host state regulator). This means that a firm operating under the TPR will not be deemed in breach of UK MiFID rules if it is demonstrated that it complies with corresponding EU MiFID rules;
- amends the Data Reporting Services Regulations 2017 to put in place a transitional arrangement in which EU-authorised data reporting services providers that meet the required conditions will be granted temporary authorisations to continue to provide data reporting services in the UK for a period of up to one year;
- provides that the EU is treated as a third-country, with certain exceptions – for example, UK firms will be able to treat Undertakings for Collective Investment in Transferable Securities (UCITS) in the EU as automatically non-complex instruments, so that they can, in general, continue to be sold to retail clients in the UK without a client undertaking an appropriateness test;
- grants the FCA temporary powers which will allow the FCA some flexibility over how the MiFID II transparency regime is operated during a transitional period of up to four years. Among other things, the temporary powers include the ability, in certain circumstances, to direct the application of the Double Volume Cap Mechanism; and
- amends the MiFID II transaction reporting regime so that UK branches of EU firms will be required to report to the FCA, as opposed to their home regulators, in the same way as UK branches of non-EEA firms are required to do. A draft SI addressing Market Abuse Regulation will be published in due course.
The draft SI is still in its developmental stages and may change before the final SI is laid before Parliament. The Treasury notes that the SI is not intended to make policy changes, other than to reflect UK's new position post-Brexit and to smooth the transition of this position. The Treasury plans to lay the MiFID II SI before Parliament in the autumn of 2018.