What does Brexit mean for MiFID II?

After the UK voted to leave the EU, David Cameron announced that he would resign as prime minister by October, and that it would be up to his successor to serve the Art. 50 withdrawal notice, triggering a two-year negotiation period. Until conclusion of the withdrawal agreement, the UK will remain a member of the EU, and EU rules will continue to apply. If no agreement is reached within the two-year period, the Treaty on European Union will automatically cease to apply to the UK. The negotiation period could be extended beyond two years, but only with the unanimous consent of all member states.

What does this mean for MiFID II in the UK? The FCA made it clear in a statement released on Friday that, as far as they are concerned, it’s business as usual for now. Until the UK formally withdraws from the European Union, EU law such as MiFID I will continue to apply, and firms should continue to work on implementation of new EU legislation such as MiFID II. MiFID II will need to be transposed into UK law by 3 July 2017, and MiFID II and MiFIR will apply in the UK from 3 January 2018, unless the terms of withdrawal are agreed before that date. This raises the likelihood that UK firms will have to comply with the MiFID II legislation for a period of time before the UK leaves the EU.

It is possible that the UK may decide to keep the MiFID II regime largely intact after it withdraws from the EU. Some of the rules are already in place, and many of the changes have been made at the UK’s behest. This would potentially make it easier for UK firms to access the EU market through the third-country provisions of MiFID II and MiFIR, on the basis of equivalence.

It’s worth remembering, however, that MiFIR only gives third-country firms a potential passport for professional clients and ECPs. The ability to do business with retail clients will still depend on the law of individual member states, unless it is carried out through reverse solicitation. Furthermore, an equivalence decision by the Commission takes time, though it could be undertaken in parallel with the withdrawal negotiations. Also, if one of the motivations for Brexit was to escape regulation from Brussels, there may be limited appetite in the next Government to comply with a rulebook over which the UK will have little control.

The EU referendum has ushered in a period of extreme uncertainty. At this point, themessage from the FCA appears to be: keep calm, carry on, and stayed tuned for further developments. One thing, however, seems clear. The FCA, HM Treasury and UK MEPs will have less influence over the development of the MiFID II regime as it moves through the crucial Level 2 rulemaking stage and into Level 3. This point was reinforced by the resignation on Saturday of Lord Hill as European Commissioner for Financial Services. Firms and trade associations wishing to shape the MiFID II agenda may therefore need to shift their focus to national competent authorities and MEPs on the Continent.