Despite being more than three years in the making, the UK’s divorce from the EU is still a cause of great uncertainty for financial services firms.
The negotiations have currently come to a stalemate as most European nations are busy dealing with the coronavirus outbreak. Not only has the pandemic put the negotiations on hold, but so has the fact that the EU’s head of Brexit negotiations Michel Barnier has tested positive for coronavirus. While there are rumours that the transition period may be extended beyond the original December 31 2020 deadline, nothing has been confirmed.
To Remonda Kirketerp-Møller, founder and CEO of Muinmos, the RegTech company, this uncertainty means that Brexit has become one the biggest challenges facing the sector.
“Even without [Brexit], it has become obvious over the years that the regulatory terminology applied by the United Kingdom is quite different for a number of the services, activities and instruments when cross-referenced with the Markets in Financial instruments Directive, better known as [MiFID II],” she tells RegTech Analyst.
“This has resulted in confusion amongst the EU member states, especially when the financial services authorities of these member states passported their financial investment firms’ services into the United Kingdom and vice-versa.”
Kirketerp-Møller adds that Brexit may make the legislations concerning financial investment firms and financial services authorities as well as “UK citizens and residents wishing to become clients of EU financial investment firms and vice versa” even more complex.
This, she argues, is due to the fact that Britain is likely to become classified as a third country by the EU. This would mean that they would not be able to rely on things such as the EU nations’ passporting rights, unless it is negotiated in the final deal.
Looking closer at what being classified as a third country would mean, Kirketerp-Møller explains that financial firms would have at least three routes to ensure they still have access to the European market. They are third country equivalence regimes, third country exemptions which may be available for UK firms in certain EU countries, or to relocate.
However, she explains that neither of these three alternatives are without challenges or downsides.
“On third country equivalence regimes, there is no guarantee that the EU authorities will actually make any equivalence determinations or even have the political incentive to do so in favour of the UK by the end of the transitional period, and even if they did, it will never be as comprehensive as the existing passporting rights which all EU firms are familiar with and use,” Kirketerp-Møller says.
“In fact, to date the European Commission has not made equivalence determinations under MiFID II in favour of any country so why would they do it for the UK? Note also equivalence is not an automatic right.”
While the UK has implemented a lot of EU laws already, the process for equivalence is not straightforward. “[The) process is likely to be lengthy and, given the determination of equivalence is ultimately made by the European Commission, subject to political considerations,” Kirketerp-Møller warns. “It is also unclear whether the UK in the long term would wish to align its regulatory regime as closely with that of the EU as the concept of equivalence would require, given its future lack of involvement in the EU legislative process.
“Also, the concept of equivalence in the context of access to markets is currently only available as an option in two sets of legislation, MiFID II and the AIFMD, and therefore would not be an industry-wide solution.”
Moving on to third country exemptions, she explains that these largely depend on each member state. “This means that where a financial investment firm wishes to provide its services and activities from the UK into the EU will need to be considered on a case-by-case basis, to determine if the relevant service and activity requires a license or some sort of other permission by the relevant regulatory authority of that specific member state,” Kirketerp-Møller says.
“To some extent, there are few countries in the EU – including Germany, Netherlands, and Ireland – where they have some exemptions which permit third-country firms to perform certain licensable services and activities without a local license provided the terms of the exemptions are fully fulfilled.”
Several financial services firms and FinTech companies have opted for the third options: relocation. UK challenger bank Revolut is reportedly relocating to Lithuania to ensure it has access to the European market. Others, like Starling Bank, are opening offices in Ireland.
However, Kirketerp-Møller believes this options is not clearcut either. “How will this be assessed by the National Competent Authorities (NCA) and how do they verify the objective of the relocation for the financial institution and avoid letter-box entities across the EU?” she wonders. “NCAs need to ensure that substance requirements are met, that sound governance of the EU entities, and each NCA need to be in position to effectively supervise and enforce EU law.”
The Muinmos founder believes the European Securities and Markets Authority (ESMA) will need play a big part in providing guidance in how relocation would work. Yet, she adds that the regulator being able to do so might still be some time away. “At this point in time ESMA’s register is not up-to-date and this will create a lot of issues in the coming period, as reliance on the data currently available on financial institutions across the EU is not an option due to the lack of consistency and discrepancy,” Kirketerp-Møller continues.
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