In our January publication, we highlighted what we were seeing as the top regulatory focus areas for our clients during the year ahead, focusing on wholesale market structures and conduct risk.
In a series of 10 blog posts, we will take a closer look at the key areas highlighted, mapping developments from the first half of 2019, and looking ahead to the remainder of the year.
Brexit – Progress Report
In this first blog, we summarise Key developments relating to Brexit.
Preparing for a no-deal Brexit
In the absence of any developments to the contrary, firms have no choice but to keep planning for a no-deal Brexit. Helpfully, HM Treasury and the UK regulators have worked hard to prepare for this outcome, and largely finalised their onshoring measures prior to the expected exit days in March and April. Despite this preparedness, UK onshored regimes are unlikely to run completely smoothly from day one, as firms are bound to encounter teething problems and unexpected consequences. Firms are likely to face a particular challenge in understanding which onshoring changes they need to implement immediately, and which changes are subject to transitional relief. We have prepared a table of “day one” action points to assist firms in this respect.
HM Treasury has attempted to help smooth the transition by granting the regulators temporary transitional powers so that all of the changes will not apply from day one, and setting out a process for finding EU Member States equivalent (although the UK government is holding off showing its hand here). However, solving many of the issues likely to arise will require bilateral cooperation, as evidenced by the recent debate between ESMA and the FCA regarding the MiFID mandatory share trading obligation.
Moving the goalposts for third country access
As Brexit uncertainty continues, the EU is taking the opportunity to reconsider its regimes for third-country access to EU markets. For example, the EU legislators are making amendments to the MiFID II third-country regime so that there will be a move away from outcomes-based equivalence assessments, to a more detailed and granular review. The changes will also allow the European Commission to impose specific operational conditions on an equivalence decision, and will require ESMA to undertake ongoing monitoring of the position in third countries granted equivalence, in order to verify whether the conditions on the basis of which the equivalence decision was taken remain fulfilled. This is just one example of a wider trend to make third-country access more difficult. One only has to look at the way in which the EU has tied its equivalence decision regarding Swiss trading venues under MiFID II to a broader political outcome to understand the challenges the UK might yet face. Further, this is not a concern only for the UK, but also for existing third countries, which could equally be affected by the changes.
The future of regulation
The UK regulators are already beginning to plan for the future, with both the FCA’s Andrew Bailey and the PRA’s Sam Woods delivering speeches concerning the future of financial services regulation in the UK. Both emphasised that they do not want the UK to become a rule-taker, and that they would advocate the UK taking a more principles-based approach to regulation and focusing more on outcomes than detailed rules. In his recent Mansion House speech, the Chancellor highlighted the need for the UK to keep evolving, so as to embrace innovation, disruption, and challenge. To further this goal, HM Treasury will lead a review of the payments landscape to ensure it is keeping pace with developments. The UK government will also launch a major, long-term review into the future of the UK regulatory framework. This review will include taking action to improve coordination between regulators, thereby increasing “air traffic control” to manage the cumulative impact of regulatory change emanating from different sources.
The regulators will contribute to the Treasury Committee inquiry into the future of the UK’s financial services. This inquiry will examine what the Government’s financial services priorities should be when it negotiates the UK’s future trading relationship with the EU and third countries. The inquiry will also look at how the UK’s financial services sector can take advantage of the UK’s new trading environment with the rest of the world, and whether the UK should maintain the current regulatory barriers that apply to third countries. The UK regulators are already starting to build more bridges with non-EU regulators, most notably in the US and Asia. For example, the US-UK Financial Regulatory Working Group met for a second time in May 2019 to discuss the outlook for financial regulatory reforms and future priorities, including possible areas for deeper regulatory cooperation to facilitate further safe and efficient financial services activity between US and UK markets.
Read the full publication: 10 Key Regulatory Focus Areas for UK/European Wholesale Markets In 2019 – Progress Report here