Thursday, June 2, 2016

Passporting, Equivalence and The City's Access to Europe Post-Brexit

One question we are often asked concerns the City's access to Europe after Brexit. Happily, the upcoming MIFIDII regulations provide a solution in the form of equivalence for what it terms ‘third country firms.’

The importance of passporting, and the concept of regulatory equivalence, has been brought up many times in the campaign. City workers are naturally worried about how a Brexit vote would affect the financial services market and their jobs. This includes, but is not limited to, those involved in the wholesale markets and UK market infrastructure institutions such as clearing houses, trading venues/exchanges and trade repositories.

Passporting (as set out under MIFID I) allows a financial institution regulated in one country of the EU to do business in the others without the need to establish a separate legal entity in each of them. Currently some 75 non-UK EEA financial institutions have taken advantage of this opportunity in order to gain access to the UK financial markets. Many financial institutions based in London (both UK and non-EU owned) have also done similar in the other direction.

Some in the City have expressed a concern that this may no longer be possible following a Brexit vote. These concerns, however, are thankfully unfounded. Under MIFID II (which comes into force in January 2018 - well before the two-year deadline of Article 50 negotiations) the policy of passporting would effectively be superseded by one of equivalence, which is based broadly on the same principal.

The City will continue to be able to access EU markets under the equivalence regime introduced by MIFIDII 
Equivalence must also be reciprocal - for example, in order for financial institutions of the remaining 27 EU member states to be able to deal in the world’s largest money foreign exchange and capital markets, UK institutions (as well as, for example, American owned ones with an established presence in the UK) must also be able to access EU markets provided that they are authorised in their home country to undertake the same services they intend to offer.

It gets better. UK-based financial institutions will have been operating under MIFID II regulations for six months (or more) before the Article 50 negotiating period ends and so will already effectively be equivalent. Unless the UK then changes its financial market regulatory structure dramatically these banks and brokers will be well placed to continue operating on an equivalence basis. Similarly, EU financial institutions will be able to continue to access the City.

The same is true for the core infrastructure institutions such as clearing houses and trade repositories based in London, Paris, Frankfurt, Milan, Madrid and Warsaw who will be able to apply for an equivalence assessment based on the legal system and regulatory structure of their respective countries. UK institutions will apply to the pan-EU regulator ESMA for recognition, and inclusion on its register of recognised institutions. EU-based institutions will apply to the FCA in much the same way. This will be done under reference to the European Market Infrastructure Regulation (EMIR) passed in 2012 which has already been used in a number of successful equivalence applications by the USA, Australia and Canada.

The City, then, would continue to be able to access EU markets under the equivalence regime introduced by MIFIDII and will already be operating as equivalent by the time the withdrawal becomes effective.

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