The state of UK financial services regulation post-Brexit has been a very popular topic of discussion, and we have now seen the first sign of divergence between the UK and EU rules, namely around the Securities Financing Transactions Regulation (SFTR).
Over the past four years, there has been a lot of speculation around how financial services regulations will change following the UK’s exit from the EU.
The EU naturally wants the UK to retain as much of their directives and regulations as possible. However, the UK has expressed a desire to adjust the way certain regulations apply to financial institutions dependent on their size and other factors to encourage competition and innovation.
Safe to say, both the EU and UK have been nervous about the negotiations. The EU is concerned that Britain could relax regulations to help UK companies gain a competitive advantage over EU rivals.
The UK, on the other hand, knows that by changing too much they risk losing their equivalence, which allows UK financial firms to passport into the EU and trade with EU counterparties.
As a result, there has been a mutual understanding that maintaining the benefits of open access will require continued consultation and trust, as well as ensuring a sufficient transition period to allow the industry to adjust.
But maintaining equivalence in the capital markets does not mean that Britain must align with all EU rules on financial services, as we have seen with SFTR. The extent to which the UK will diverge has therefore long been topical. And if we look at regimes like Mifid II, many are wondering how areas like EMIR and Mifid II reporting will be impacted.
What will UK financial regulation look like post-Brexit?
The answers, of course, will be influenced by the outcome of the current trade negotiations, which will define the scope in which the UK will be able to diverge from EU financial services legislation.
We have, however, now seen the first sign of divergence. In June, it was announced by the government that the UK will not implement the fourth phase of SFTR, which applies to Non-Financial Counterparties (due to apply in the EU from January 2021).
In what is seen as a sign of things to come, Chancellor of the Exchequer Rishi Sunak explained that the UK will “exercise its discretion” when implementing EU regulations that will not have come into force by the time the Brexit transition period ends (31 December 2020).
This is beginning to give us clarity around the UK’s position on European regulations and represents the first concrete example of the UK taking a different path to the EU. This, in turn, gives us a better understanding of the rules, which will govern the UK’s financial services sector after the departure from the EU.
There are, however, concerns that the negotiations will be politicised, and that as the UK diverges from Europe, the EU’s equivalence decisions could be withdrawn at very short notice.
Having said that, the UK has very often led the way within Europe on the regulatory response regarding conduct and financial stability issues, and as key influencers of the current EU legislation, one can only hope that the UK won’t make any substantial changes.
Some anticipated highlights
- UK financial regulation is likely to become tougher post-Brexit, evident from the government’s proposal to impose super-equivalence after the transition period.
- The supervisory priorities required for operational resilience in the UK seem to go substantially further than current European guidance.
- The UK will remain important in setting international standards, even though it no longer has direct influence over EU legislation.
- There will likely be pressures for a degree of divergence between UK and EU financial regulation to reflect the differing regulatory and supervisory priorities and approaches, even where both regimes aim to deliver broadly similar outcomes.
- Changes to MiFIR and EMIR – dual reporting: Brexit will impact both MiFIR and EMIR reporting, affecting branches, delegated reporting, outstanding trades, reportable instruments and personal data standards, amongst other things. Following Brexit, reporting obligations under Mifid II will be similar to the current requirements. However, when an EU investment firm has executed its transactions via a UK branch or vice versa, the entity will have a dual reporting obligation.
- The FCA has made it clear that the branch will no longer be able to discharge the reporting obligations by transmitting orders to the other entities. In this event, the investment firm will need to be contracted to both a UK ARM as well as an EU ARM to allow the functionality of dual reporting.
Looking to EMIR, the FCA has also stated that, “UK branches of third-country firms (including branches of firms from EU27 countries after Brexit) are not in scope of the UK EMIR reporting regime and so do not have to report under the onshored UK regime.”
While this removes one element of potential branch-level dual reporting, the FCA has also stated that branches of UK-established firms outside the UK are within scope of the UK EMIR reporting regime.
According to the FCA, all new derivative trades entered into by UK counterparties on or after 11pm on exit day are in scope of the UK EMIR reporting regime and are required to be reported to an FCA-registered, or recognised, Trade Repository (TR).
In addition, all outstanding derivative trades entered into by UK counterparties on or after 16 August 2012, need to be held in an FCA-registered, or recognised, TR on exit day.
The bottom line is that any firm believing that they no longer need to worry about the completeness and accuracy of their previous reporting are sadly mistaken. The UK authorities will have access to this data, and they will expect it to be correct.
Future implications – more complexity
Many financial services firms in Britain have already opened hubs in the EU to continue serving customers there, irrespective of the deal London seals with Brussels. Many service providers in the regtech space have taken similar steps.
Because of the requirement for dual reporting for firms trading with EU counterparties, it is likely that regulatory reporting will increase in complexity.
For firms concerned about future-proofing regulatory reporting, our advice is to follow a data-first strategy, and not implement different technology for different regulations.
Thankfully there are regtech vendors that offer a single technology platform to capture all data required for reporting and other regulatory obligations, which can quickly and easily automate dual reporting requirements, as well as future divergence requirements that may come down the line.
Change is coming – be prepared
The developments over the next few years will be of critical importance for financial institutions.
Firms are likely to face considerable uncertainty, complexity and cost as the UK regulatory landscape adjusts post-Brexit and as further divergence in regulatory and supervisory approaches between the UK and the EU inevitably emerge.
There are also more immediate questions about whether the UK will implement mirror new or changed EU regulation during 2020 and 2021, with SFTR being the first sign of divergence.
While it is without doubt that the UK financial regulation will be different in the post-Brexit transition world, scheduled to begin in January 2021, how different remains to be seen.
As financial firms plan for divergence, technology presents a number of solutions. At this point, perhaps the most important consideration is the flexibility of regtech and how easily it can evolve with the upcoming regulatory changes.
Matt Smith is CEO of SteelEye, a fast-growing compliance technology and data analytics firm. After two decades in financial services, he is now focused on helping financial institutions use technology and data to gain a competitive edge and solve complex regulatory challenges. Prior to SteelEye, Smith was the CIO at Noble Group, responsible for regtech and the deployment of big data, trading and analytics platforms. He then worked at Bloomberg, delivering financial regulation and compliance solutions.