Brexit

ESMA Comments on MiFID II Implementation and Brexit

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On September 29, 2017, Reuters.com reported on comments by Stephen Maijoor, ESMA Chair, on the implementation of MiFID II and Brexit.

Mr. Maijoor believes that while implementation of the new rules under the MiFID II Directive (2014/65/EU) and Markets in Financial Instruments Regulation (Regulation 600/2014) may trigger some glitches, broader disruption is not anticipated.

Reuters.com also reports that the FCA has said that it would not punish firms for “not meeting all requirements straight away where there is evidence they have taken sufficient steps to meet the new obligations by the start date”. Mr. Maijoor further commented that it is likely that regulators would look differently on a violation on January 4, 2018, from one at a later date.

Regarding Brexit, Mr. Maijoor observed that MiFID II had been designed on the basis that the most liquid European market would indeed be within the EU. Depending on how Brexit negotiations progress, he believes that the exit of the UK from the single market would affect some elements of MiFID.

According to Mr. Maijoor, ESMA has begun assessing the impact of a possible “hard” Brexit on the stability of the EU’s securities market. This includes considering the position of credit rating agencies (CRAs) and trade repositories (both of which ESMA directly regulates), and protection for EU investors in UK-based mutual funds.

ECB Publishes Interview Transcript on the Preparatory Work of Banks and Supervision as a Result of Brexit

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The European Central Bank (“ECB“) has published a transcript of an interview, given by Sabine Lautenschlager (ECB Executive Board Member and Supervisory Board Vice-Chair), on the kind of preparation affected banks will have to undertake following the UK’s decision to leave the European Union. The interview is wide ranging, but includes the following pertinent points:

  • The ECB wants euro-area banks to be proactive and well prepared and is currently in discussion with all euro-area banks under its supervision that will be affected by Brexit.
  • The ECB has suggested that all affected banks should prepare for a hard Brexit. It has also recommended that all affected banks create their strategies for Brexit quickly and pass these on to the ECB, as they only have an extremely narrow time frame in which to assess plans and applications.
  • The ECB has itself set up a project to prepare for Brexit. It will need to increase its staff as it expects a significant increase in the number of internal model applications, qualifying holding procedures and licensing applications.

To see the full interview, please click here.

BBA Brexit Quick Brief on UK WTO Profile and FTAS

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On May 10, 2017, the British Bankers’ Association (BBA) published a Brexit quick brief: “External trade policy and a UK exit from the EU – the UK’s WTO profile and beyond”.

The UK’s decision to leave the EU means that the UK will cease to make trade policy collectively with the EU and will need to reestablish a trade policy within the context of the World Trade Organization (“WTO“). The quick brief considers issues relating to the UK’s profile at the WTO and free trade agreements (“FTAs“) arising from Brexit and, as applicable, the potential impact on financial services.

It considers issues such as the confirmation of content in the UK’s schedule of commitments under the General Agreement on Trade in Services (GATS). It also notes that the UK will need to consider the implications of losing the preferential access granted to UK-based exporters through the FTAs agreed on its behalf by the EU; it is uncertain whether these agreements can simply be translated to the UK. Further, the UK currently has framework arrangements in place with non-EEA countries that are embedded in EU legislation, including arrangements relating to financial market infrastructures and data protection. The quick brief comments on the fact that the UK will need to reestablish those arrangements in order to reflect its status outside the EU. It also notes that the UK will be able to enter into new FTAs with non-EU markets.

Brexit – European Council Adopts EU Negotiating Guidelines

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On April 29, 2017, a Special European Council, meeting as 27 member states, adopted the Article 50 guidelines to formally define the EU’s position for the Brexit negotiations with the UK.

The guidelines are set out under six headings that cover core principles, a phased approach to the negotiations, an agreement on arrangements for an orderly withdrawal, preliminary and preparatory discussions on a framework for the EU-UK future relationship, the principle of sincere cooperation, and the procedural arrangements for negotiations under Article 50.

On May 22, 2017, the General Affairs Council is expected to authorize the opening of the negotiations, nominate the European Commission as the EU negotiator, and adopt the negotiating directives. The guidelines and the negotiating directives may be updated in the course of the negotiations as necessary.

European Parliament Publishes Provisional Version of Resolution It Has Adopted on Its 2016 Report on Banking Union

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The European Parliament has published a draft of the text of the resolution it has adopted on its annual report on banking union. The Parliament’s resolution is divided into themes, these being resolution, supervision and deposit insurance. The Parliament notably encourages all states that have yet to join the Euro currency to do so or to join the banking union, so as to align the internal market with the same.

It also expresses concern at the growth of the shadow banking sector and highlights that the UK’s Brexit referendum result now requires a substantive assessment of EU-wide financial supervision, with particular focus on ensuring that exit negotiations played out between the two parties should not lead to an uneven playing field between non-EU and EU financial institutions. In particular, the Parliament stands by the current levels of regulation and suggests that the exit vote and negotiations should not be used to generally promote deregulation of the financial markets across the EU as this may have dire economic consequences internationally.

The resolution can be found here.

The Financial Services Aspects of the Brexit White Paper

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On February 2, 2017, the Department for Exiting the European Union, the department of the UK government tasked with extricating the UK from the EU, published a white paper on the UK’s exit from and new partnership with the EU. The white paper contains further detail on the UK government’s approach to financial services in sections 8.22 to 8.26.

The white paper states that the UK government will target the following aims in its negotiations with the EU in respect of the financial services sector:

  • Achieving the “freest possible trade” in financial services between the UK and EU member states.
  • Establishing strong co-operation and oversight arrangements with the EU, reflecting the interconnectedness of financial markets. The paper suggest that the UK will continue to support and implement international financial standards.
  • Negotiating on the UK’s future status and arrangements with regard to EU agencies, including the European Supervisory Authorities (ESAs) (that is, ESMA, EIOPA and the EBA).
  • Agreeing on a “phased process of implementation” to allow for the UK and the EU to prepare for the new arrangements that will apply following the UK’s departure from the EU. It is suggested that the phased process might relate to the future legal and regulatory framework for business. In any event, the UK government will take steps to mitigate the impact on economic and other functions, including passing legislation if necessary.

The UK government argues that factors such as the UK’s legal system, language and infrastructure will help to ensure that it remains a preeminent global financial center after the implementation of Brexit.

Further to the publishing of the white paper, the Financial Markets Law Committee published a letter on February 3, 2017, addressed to Andrew Tyrie, Treasury Select Committee chair, commenting on the UK’s financial services industry in the context of the UK’s withdrawal from the EU. The letter has been written in response to the Committee’s inquiry on the UK’s future economic relationship with the EU. The letter notes that post-Brexit, the UK will lose access to the European single market in financial services and will become a third country from the perspective of EU law. The letter notes that there are serious uncertainties as to the conditions that the UK and regulators will have to satisfy as a third country. As such, staged transitional arrangements negotiated well in advance of the UK’s withdrawal from the EU will be valuable in promoting legal certainty and minimizing disruption.

Brexit: Supreme Court Ruling

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The UK Supreme Court rules that the Government cannot trigger Article 50 without a vote in Parliament.

Following the June 2016 referendum, the UK Government proposed to use its prerogative powers to withdraw from the EU by serving a notice in accordance with Article 50 of the Treaty on European Union, withdrawing the UK from the EU treaties. To read the full article, please click here.

High Court Ruling on Brexit

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On November 3, 2016 the UK High Court handed down a ruling[1] preventing the UK government from triggering Article 50 TFEU – the EU legislation triggering the start of the administrative procedure for the UK’s exit from the EU – without parliamentary approval.

Following the referendum on June 23, 2016, where the UK voted to leave the EU, Prime Minister Theresa May and the UK government announced that they would use the Crown’s prerogative powers to trigger Article 50 as early as March 2017. The use of prerogative powers would allow the government to trigger Article 50 without the approval of the UK parliament. Claimants argued that the government’s position had no basis in law, in particular under the UK’s European Communities Act 1972 and that the government’s position was contrary to fundamental constitutional principles of sovereignty of parliament.

Ruling in favor of the claimants, the High Court found that the government does not have the power under the Crown’s prerogative to give notice pursuant to Article 50 for the UK to withdraw from the EU, meaning that any trigger of Article 50 requires parliament to vote on the matter. As a result, pending appeal, any decision to trigger Article 50 will require approval by MPs in the House of Commons, as well as approval by the House of Lords.

Following the ruling, the government has confirmed that it will seek to appeal the judgment to the UK Supreme Court. A hearing before the Supreme Court could take place as early as December.

The High Court ruling has important implications for the “Brexit” process. In particular, it gives the parliament an important role to play in the process. With a majority of MPs having voted against Brexit in the referendum, the outcome of a vote to trigger Article 50 cannot be certain. Having said that, MPs will not want to be seen as going against the will of the people and outright opposition to the triggering of Article 50 seems unlikely. Instead, the practical effect is likely to be that the government will have to engage with and at least to some extent agree with parliament on the priorities of the UK’s Brexit negotiation with the EU. This, in turn, may cause delay, increase uncertainty (as to timing and outcome) and will inevitably intensify the public debate about the UK’s role outside the EU and the meaning of “Brexit”.

The full judgment can be found here.

[1] R(Miller and others) v Secretary of State for Exiting the EU [2016] EWHC 2768 (Admin)

House of Lords EU Committee Launches Inquiry into Brexit and Financial Services

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On August 31, 2016, the House of Lords EU Sub-Committee on Financial Affairs published a webpage announcing the launch of an inquiry into Brexit and financial services in the UK. The Sub-Committee will begin its inquiry with two evidence sessions concentrating on the consequences of the referendum result for financial services and potential future arrangements.

The issues to be considered by the inquiry are as follows:

  • The reaction of financial services firms to the outcome of the EU referendum result
  • The possibility of the relocation of financial services firms from the UK
  • Priorities for the UK financial services sector in the withdrawal negotiations and in negotiating a future relationship for the UK with the EU
  • Equivalence rights to access the EU single market for the UK
  • Financial regulatory co-operation between the UK and the EU under different models of EU membership
  • A potential free trade agreement and the UK’s financial sector
  • Potential transitional arrangements
  • The importance of passporting rights for firms operating in the UK
  • Risks for retail customers and investors
  • Considerations for non-EU firms wishing to gain access to the EU through the EU’s equivalence regime

Brexit – What Now For Your Business

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So, the UK has voted to leave the EU. Everyone has their own opinion and we’ve all seen the news reports and various viewpoints but what does this result mean for you in practical terms and where do we go from here? Orrick’s EU-UK Working Group is ready and waiting to answer any questions you may have (see contact details at the end of this alert) and in the meantime, here’s our overview of the key issues for your business. READ MORE →