A period of economic and political uncertainty for the UK...

What happens next?

London is a pre-eminent financial services centre, and many of Europe's finest banks, investment firms and brokers currently work and reside in the capital of the UK. Since the Brexit vote on 23 June, however, a shadow has been cast-over London's place in the world pecking-order of financial markets, and many commentators have predicted a period of economic and political uncertainty for the UK whilst it re-aligns and re-negotiates its position with the EU. In this article, we will consider what the short term implications of Brexit are for the UK capital markets, and the potential scenarios going forward.

MiFID and passporting rights

Under the Markets in Financial Instruments Directive ("MiFID") banks, brokerage houses and other financial institutions authorised and licenced in the UK by the Financial Conduct Authority are able to provide financial services to customers throughout all of the 28 EU Member States. This principle is known as "passporting" of regulated activities and is a key principle underpinning the EU's principle of harmonisation of the conduct of investment business and operation of capital markets throughout the EU. If the UK were to invoke Article 50 of the Lisbon Treaty, as seems likely at some point in the foreseeable future, and formally start the process of leaving the EU altogether, then in theory at least, UK banks and investment houses would be set to lose all of the benefits they currently enjoy under MiFID.

Upon the UK leaving the EU, those financial institutions would be unable to access the single market as far as financial services are concerned, until such time as the UK agrees a deal with all the other EU member states to retain membership of the single market for financial services, in which case the UK financial services industry could continue to enjoy its passporting rights and trade freely with the other 27 member states. Otherwise, if no deal is struck or one that does not preserve the single market rights which the UK currently enjoys, then UK financial institutions would need to set-up and operate a separate regulated entity within another EU Member State. Therefore, how could the UK achieve preservation of MiFID passporting rights? Potentially, by becoming a member of the European Economic Area ("EEA"), like Norway for example, or (taking the Swiss model) by becoming a member of the European Free Trade Association, with bilateral agreements between the UK and the EU governing, amongst other things, the single market for the provision of financial services.

Whatever agreement the UK government eventually reaches with the EC on financial services, one thing is certain, it will have to maintain and accept regulatory standards that are at least "equivalent" to current and on-going EC standards, and that will entail (of course) continuing to adhere to EC legislation, including EC Directives and Regulations.

For UK brokerage house, banks and other financial institutions that rely upon access to and trading on EC regulated markets, there will continue to be a need to be able to conduct their business in most, if not all, EU Member States, so it is extremely likely that the UK government will do everything necessary to ensure that an equivalence decision was obtained; meaning very little change to the status quo from a regulatory perspective. Furthermore, given the importance of the City and the UK's financial markets to the UK's GDP, it will be a key point for negotiation between the UK and the EU that London's capital markets remain within the scope of the single market and MiFID.

What next?

It remains very much in the UK's national interest to keep the single market and MiFID passporting for the UK's financial services sector, including the UK's capital markets, otherwise the UK risks losing a significant amount of revenue, jobs and wealth creation. Whilst negotiations between the UK and the EU over the coming weeks and months will be fraught, at times, with many twists and turns, one hopes that shared interests and the need to be good trading partners prevails, and that the UK's financial services sector can find its passport to future success – whatever the UK/EU relationship may turn out to be.

If you would like any additional information as to the matters set out in this newsletter then please contact us on +44 (0)20 7529 5420.

Disclaimer: this newsletter is provided for general information only and is not intended to be nor should it be relied upon as legal advice in relation to any particular matter.

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