Now that Article 50 has been triggered, what happens next?
Now the fun can really begin. By triggering Article 50, the UK has officially started the process of withdrawing from the EU. This means that the UK and the EU27 (the remaining EU countries) can negotiate the divorce settlement.
How long will this process take?
Article 50 gives the UK and EU27 two years to reach an agreement. The negotiation period can be extended if both parties agree to it. However, any member of the EU27 can veto an extension. In reality, the process is so complex that it likely will take longer than two years. The real question is whether or not an extension will be agreed upon.
What happens if an agreement isn’t reached and the negotiations aren’t extended?
Nothing good. The UK would be in legal limbo. It would be outside of the EU and would have to fall back on the WTO (World Trade Organization) rules. Overall, this would be greatly disruptive not only to financial services but to the global economy.
Yikes. So, what do you think the outcome of the negotiations will be?
It’s hard to say for sure but, as we’ve written before, there are three possible outcomes:
- Hard Brexit
The UK would be completely separate from the EU, with no negotiated access to the EU market. If this were to happen, the UK would not have access to the EU single market and equivalence would not be an option.
- Medium Brexit
The UK would have some level of restricted access to the EU single market. For financial services, this could mean the UK would access the EU through the equivalence regimes, rather than through full passports.
- Soft Brexit
This is the closest to the status quo and would leverage an existing framework known as the European Economic Area (EEA), which allows for non-EU countries to participate in the EU single market. Non-EU members of the EEA are committed to the free movement of people, goods, services, and capital in the EEA and are required to implement most of the EU’s laws and regulations.
Judging by the rhetoric on both sides, the most likely scenario will be on the harder end of scale. However, even if that is the case, there is hope that transitional arrangements can be negotiated to avoid a sudden, sharp Brexit.
By the way, does triggering Article 50 affect the implementation of MiFID 2 in the UK?
Unfortunately, no. During the two-year negotiation period, the UK remains in the EU and all the relevant regulations will continue to apply. The UK’s FCA (Financial Conduct Authority) made this point abundantly clear in the days following the Brexit vote:
“Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.”
UK asset managers must continue to abide by existing EU regulations and implement new rules, such as MiFID 2 (The Markets in Financial Instruments Directive) and PRIIPs (Packaged Retail and Insurance-based Investment Products).
But after the negotiations are done, UK asset managers won’t have to abide by EU regulations, right?
Well, yes and no, but mainly no. EU financial regulation is already enshrined in UK law and leaving the EU doesn’t automatically mean that all EU regulation disappears from UK law. Rather, the regulations would need to be repealed. It seems unlikely this will happen right away, if ever.
It will depend on the final settlement but any hope of accessing the EU single market will rest on the UK maintaining comparable regulations in place. Also, it’s worth remembering that the UK isn’t exactly a shrinking violet when it comes to regulation. In fact, the UK is often a much tougher regulator of financial services than its EU counterparts.
Got it. So, when the settlement is finalized, will cross-border management companies still be allowed in the UK?
Okay, but will UK managers still be able to use MiFID permissions to sell into EU?
Will reciprocal access between the UK and EU fund markets remain?
So you’re saying that we still don’t know much more than we did before?
Yes. While we know the timeline, the outcome of the negotiations remains up in the air. It’s likely that it will be a few months before we have a sense of what the specifics of the divorce settlement will look like. Ultimately, it will come down to what the relationship between the UK and the EU looks like. The harder the Brexit, the less access the UK will have to the EU market.
So there’s nothing to do right now?
Oh no, there’s work to be done. At the very least, firms should have performed an impact analysis of the possible Brexit outcomes and formulated their contingency plans in the event that the Brexit negotiations go sour. Given the likelihood of a harder Brexit, asset managers are coming to the conclusion that they will need additional substance in the EU to deal with the issue related to the MiFID and Management Company passports. Even before the negotiations conclude, some asset managers will probably start to establish new offices in the EU as a way to Brexit-proof their businesses.
This going to be a headache, isn’t it?
Pretty much, yes.