Following the UK’s referendum we set out some basic questions for financial services firms.

  1. The result of the referendum vote means that the UK has immediately left the EU?

No. Following the referendum result the UK needs to negotiate with the EU its withdrawal. In addition, it also needs to negotiate at the same time its post exit arrangements with the EU and other countries.

The procedure for negotiating the UK’s withdrawal from the EU is set out in Article 50 of the Treaty on European Union. This is the only lawful route available to withdraw from the EU. The procedure under Article 50 has never been used before.

To invoke the Article 50 procedure the UK needs to notify the European Council of its intention. As to when the UK will actually do this is open to debate. However, in his statement on the referendum result, the Prime Minister stated that his successor should be the person who makes the notification. The Prime Minister has said that in his own view, the new leader of the Conservative Party (and therefore Prime Minister) should be in place by October.

Once the Article 50 notification has been made the UK has a two year period in which to reach an agreement with the EU. The two year period can be extended if all the Member States within the EU agree.

The important point to note is that until the UK leaves the EU it continues to be bound by EU legislation. This includes any EU legislation that becomes applicable whilst the UK is negotiating its exit arrangements.

  1. Following the referendum vote, UK firms don’t have the right to passport under EU Single Market Directives?

No. As mentioned above, the UK still remains a member of the EU until it has exited under Article 50. UK firms therefore continue to have passporting rights under the EU Single Market Directives. These continue whilst the UK negotiates its exit.

One would expect that in any exit negotiations, the UK will seek to keep passporting arrangements (maybe through membership of the EEA) but until negotiations begin it is too early to say what might happen.

If passporting rights lapse, firms need to consider how their business model and group structures need to change.

  1. MiFID II / MiFIR won’t apply in the UK?

Probably not. The date of application of both MiFID II and MiFIR has recently been delayed by one year (3 January 2018). If the UK were to give notification under Article 50 in October 2016 and the following negotiations were to take the full two years (October 2018), the UK would be expected to apply MiFID II and MiFIR as from 3 January 2018.

It would be expected that when the FCA comes to implement MiFID II and MiFIR into its Handbook it will take into account the UK’s exit negotiations.

  1. A great deal of financial services legislation will be re-written following the referendum vote?

Probably not. Whilst the UK could design its own system of financial regulation it is worth remembering that it continues to be a member of a number of international standard setting bodies such as the G20, the Basel Committee on Banking Supervision and the Financial Stability Board (FSB). For example, in terms of over-the-counter derivatives the UK would need to follow the G20/FSB standards on central clearing of derivatives and the margining of non-centrally cleared derivatives. On bank capital requirements, the existing requirements would probably continue to apply but with three caveats: (i) where the Basel Accord is more liberal than EU rules (e.g. in the area of remuneration) the UK could follow the Basel approach; (ii) as the Basel Accord sets only minimum standards, the UK could still choose to impose higher standards on UK authorised firms; and (iii) the UK could restrict the application of the Basel rules to internationally active banks and apply a lighter regime to small banks.

It is worth noting from a banking perspective that the CRD IV does not contemplate at the moment a framework for third country access. The need for an EU subsidiary that could provide banking services into the remainder of Europe under the passport system would become fundamentally important in that scenario.

  1. Can a firm just bury its head in the sand?

No. Firms will need time to assess the implications of the vote. They will also need to keep an eye on how events develop over the next 2 or so years.  Boards will need to be informed on the risks and opportunities arising from the vote and this will involve conducting due diligence on business lines and risk mitigation strategies. Long term strategic planning may also have to be reviewed taking into account various strategies that involve the different types of post exit arrangements that the UK may have (for example EEA membership or having a series of bilateral agreements in place similar to Switzerland).

View Brexit – What does the leave vote mean for financial services firms, 24 June 2016