Writing on the weekend of 11/12th October and as the Hallowe’en deadline approaches, it seems to get more, rather than less, difficult to predict the Brexit flightpath and the ultimate destination. Of the multitude of possibilities, few, if any, can now be ruled out. The UK may or may not leave the EU. If it leaves, it may do so under an Article 50 Withdrawal Agreement (WA) or under a no-deal scenario (NDS). (There was a wave of further publications this week from UK and EU authorities about the NDS regime - see Documents 1 to 8 - and various additional documents - listed below. Document 9 below is a reminder of some of the problems which remain for the NDS regime.) There may or may not be a UK-wide referendum to approve a WA and/or a referendum in Northern Ireland to approve their special status. The outcome of any referendum is too close to call. A general election seems very likely, but the timing and sequencing are far less clear; the election might follow an NDS exit or follow completion and ratification of a WA or might precede ratification of a proposed WA. The election might precede a referendum, avoid a referendum or set the stage for a later referendum. Domestic politics are highly volatile, so the result of the election, when it happens, is also uncertain. The date of a UK exit is also entirely unpredictable; on 31st October or after a short extension (for example, to enable the treaty text to be competed or for the UK’s Withdrawal Agreement legislation to be enacted), on 31st January (as envisaged in the Benn Act) or after a longer extension to facilitate an election and/or referendum?
Assuming an exit at some point, there are a multitude of possible outcomes and a wide spectrum of ‘Brexit destinations’ for the goods sector. For financial services (FS), however, the position is a bit clearer.
As reported in previous updates, the destination for FS has already been negotiated by Mrs. May’s government in the Political Declaration (PD). As we explored in last week’s update, Mr. Johnson’s team may well put forward some changes to the PD drafting on services and FS (along the lines of the amendments prepared by the Alternative Arrangements Commission). This improved wording would be a better basis (for the UK) for the negotiation of the EU/UK Free Trade Agreement (FTA), but it does not change the fundamental principle of the UK’s status as a third country with limited opportunities for EU mutual recognition and no treaty-based rights for FS firms. The outlook is further restricted by the success of the EU’s hardline position in FS, its acceptance by Mrs. May and, now, by the Johnson policy of a complete break from the EU regime (which includes abandoning the level-playing field obligations accepted by Mrs. May).
The Labour Party envisages a new WA/PD package if they can form a government before exit. A Labour government elected at a later stage might well redefine the parameters for an FTA or even seek to replace or amend an FTA concluded by a Conservative government. Labour is not proposing that the UK remains in the single market as an EEA member but advocates ‘a close single market relationship’ or ‘close alignment with the single market’ which appears to cover services as well as goods, but presumably without EU free movement or state aid rules; it seems unlikely, however, that any such cherry picking would persuade the EU to reverse its current hardline on FS.
In short, if and when the UK leaves the single market (which might be on exit or at the end of a transitional period), there will be a major change for UK firms – at the extreme end of original predictions in terms of the new regulatory barriers to trade, particularly for mode 1/cross-border services business. The unknowns are about timing and the political context when the guillotine falls. A breakdown of EU/UK relations (either on exit without a WA or if FTA negotiations break-down during a transitional period) will bring extra difficulties. For most firms there will be no equivalence in place at all (the UK would be worse off than a range of countries from Switzerland, Bermuda and Japan and – even conceivably - Argentina, Thailand, Indonesia and the Faroe Islands.) Certain City market infrastructure does have vital EU equivalence arrangements in place for exit, but these are designed to expire in March next year. FS equivalence, and the broader regulatory discretion over UK groups with EU operations, may be a powerful tool for the EU in an escalating dispute with the UK after an NDS exit.
- BoE: Financial policy summary and FPC meeting
BoE has published the summary and the Record of the FPC meeting of 2 October 2019. Topics include: the resilience of the UK financial system to Brexit and to global risks; vulnerabilities in open-ended funds; payment systems and benchmarks. The record states that; ‘Although actions by businesses and authorities have resulted in some improvement in the preparedness of the UK economy for a no-deal Brexit, material risks of economic disruption remain’ However the Bank emphasis that the ‘core of the UK financial system was resilient to and prepared for … a worst-case disorderly Brexit’.
- HMG: No deal readiness report
- FCA: Update to the supervisory statement on the operation of the MiFID transparency regime
FCA has updated this webpage. This new statement should be read in conjunction with the initial statement. The update provides details of changes affecting the double volume cap, equity transparency, non-equity transparency, Systematic Internalisers, Tick sizes and expands the types of derivates caught under the FCA FITRS.
- ESMA: Brexit update
ESMA has published a statement on preparations for a no-deal Brexit, noting that some of the measures previously announced have been updated. These relate to: the use of UK data in ESMA databases and performance of MiFID II calculations; impact of no-deal Brexit on MiFID II/MiFIR and the Benchmark Regulation and operational plans related to ESMA databases and IT systems.
- FCA: FITRS instructions
FCA has published the instructions for its FITRS (Financial Instruments Transparency System) which will replace ESMA’s FITRS.
- EC: Statement by Michel Barnier
The text of the statement by Michel Barnier of 9 October 2019 is available here. He sets out four issues still to be resolved: border checks in Ireland, finding a legally operational solution, the consent of Northern Ireland and the Political Declaration. Barnier explains that Johnston has asked for the removal of the reference to ‘a level playing field’ in the Political Declaration. Barnier states that this leaves the EU ‘faced with this request for a basic free trade deal, which runs the risk of regulatory competition, even fiscal, social or environmental dumping. We will not accept this.’
- FCA: Brexit - latest expectations for firms
FCA highlights that firms should take reasonable steps to be prepared to comply with post-exit MiFID transaction reporting and EMIR trade reporting requirements (which are detailed in the press release). FCA also sets out requirements for passporting in the event of no-deal and with regard to the Temporary Permissions Regime. FCA states that it will generally expect firms to have a physical presence in the UK to help ensure effective supervision and will be consulting on its approach and expectations shortly.
- Department for Exiting the EU: International agreements if the UK leaves the EU without a deal
A number of agreements have been updated, including with regard to insurance. Full details are available here.
- ISDA: The case for coordination
This ISDA article considers the derivatives trading obligation in the event of a no-deal Brexit.
Other publications from the RegZone Brexit news feed
EBA: Communication on Brexit
EBA’s communication concerns remaining issues related to the preparation by financial institutions for Brexit and urges firms to continue their progress on contingency planning.
ESMA: Speech by Steven Maijoor: Building the EU Capital Markets Union while fostering global financial markets
Text of Steven Maijoor’s speech of 10 October 2019 follows. Topics include: equivalence and CCPs; fintech and sustainable finance.
ECB: Supervisory priorities and risk assessment for 2020
ECB’s supervisory priorities include supervisory activities aimed at strengthening banks’ resilience; continuing balance sheet repair and following up on Brexit work. The supervisory priorities are available here and the risk assessment can be accessed here.
FCA: MarketWatch 61
This short edition of MarketWatch highlights Brexit issues for firms.
HoL: Queen's Speech: Debate - days 1 and 2
This HoL Library briefing has been published ahead of the debate on 15/16 October 2019. It covers, amongst other matters, exiting the EU and secondary legislation in relation to the Sanctions and Anti-Money Laundering Act 2018. The briefing notes that several Brexit bills were lost at the close of the previous parliamentary session on 8 October 2019, including the Financial Services (Implementation of Legislation) Bill, and adds that it is unclear whether these bills will be reintroduced and in what format. It reports that the Government has said it is “satisfied that all the bills that are needed prior to leaving the EU on 31 October are in place”.
EC: Commission Delegated Regulation (EU) 2019/1705 of 10 October 2019 amending Council Regulation (EU, Euratom) 2019/1197
This Delegated Regulation, concerning the deadlines by which the UK would have to fulfil the conditions for eligibility for EU funding following Brexit, has been published in the Official Journal.
EC: Statement following 11 October 2019 meeting
The EC has published a short statement following the meeting between Michel Barnier and Stephen Barclay.