With days left until the UK officially leaves the EU, David Clee, CEO of MirrorWeb, explains how the divorce may change how British businesses operate.
The UK is leaving the EU on January 31. The conscious uncoupling from the bloc could mean huge changes in how the UK’s financial sector is regulated as Boris Johnson has said that there will be “no alignment” with EU laws.
One of the most important laws regulating the sector is the EU’s Markets in Financial Instruments Directive (MiFID II). This piece of legislation, which is famously complicated, was enforced in 2018.
As the name suggests, it is an update to the previous legislation that was introduced in 2007. Both the old and the new one were set up to harmonise the regulatory framework protecting investors in the bloc by boosting transparency in financial markets. It also outlines how financial firms should report their trading to ensure compliance with the law.
But complicated as it might be, MiFID II also outlines some of the foundations for financial services firms in the UK to trade across the EU.
For instance, it is the piece of legislation that gives UK traders their so-called passporting rights, which essentially empowers them to trade across the trading bloc without having to seek further authorisation from any other European Economic Area state.
As such, ensuring compliance with MiFID II has been at the top of the Financial Conduct Authority’s (FCA) list of things financial firms should do to prepare for Brexit.
So what will happen with MiFID II when Brexit happens? “This depends on the manner of which we leave but the FCA did admit in late 2019 that even though it would continue to work closely with European regulators, it would look to explore ‘flexibility’ of EU laws after the withdrawal,” says David Clee, CEO of MirrorWeb, when speaking with RegTech Analyst.
“There is already a special provision for MiFID II under the EU Withdrawal Act, clarifying it would still continue to apply after Brexit, but if the regulator and the industry in general can explore some flexibility and leniency then they may well do that.”
Yet, the MirrorWeb CEO does not believe the regulations will change immediately on January 31. “For the time being after Brexit, we think it is fair to say it would still be business as usual as far as MiFID II is concerned – not least because there is a special provision for it in the EU Withdrawal Act,” Clee argues. “However, with MiFID II already under official review, it’s hard to say that it will be ‘business as usual’ for anyone – in the UK or EU – after a while.”
One the main things that may change is the UK’s financial services passporting rights. “MiFID II allows for passporting among EU member states and, if the UK ceases to be a member state, then passporting rights will no longer apply to the UK,” Clee explains. “However, the UK is a major financial economy for Europe so firms will clearly try and work around this. Already, the FCA has published a direction clarifying how EEA marker operators can apply to be recognised overseas investment exchanges (ROIEs) to continue to participate in UK markets. However, as already mentioned, the Withdrawal Act has already accounted for MiFID II and the British government will be keen to allow trade doors to remain open for finance.”
The changing legal landscape could also prove to be a huge opportunity for RegTech companies. “This could be a gamechanger for the RegTech industry,” Clee says. “While Brexit has had a three years-plus runup period, there is a very good chance regulatory change could come fast and thick in the following years. The need for efficient and excellent RegTech solutions will be higher than ever and, from the way the industry has grown rapidly in the past few years, it is clear the UK scene has the resources, knowledge and ambition to take advantage of this.
He concludes, “Yes, there may be some uncertain times ahead politically and, potentially, economically, but such a huge change could be just what the RegTech industry needs to show how good it has become.”
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