Last week, the Financial Conduct Authority (FCA) revealed several critical indicators of what a post-Brexit world might look like.
The UK’s Financial Conduct Authority (FCA) has shown its thoughtful approach and sensitivity to needs of the financial services industry trying to prepare for Brexit. In her first speech as Executive Director of International at the FCA, Nausicaa Delfas, touched on the impact of Brexit on derivative contracts, temporary passport permissions, and equivalence. The level of direction and clarity provided is the greatest indicator so far as to both the FCA methodology in managing the Brexit process and what it deems a workable transition period. Delfas addressed the current negotiation period, the future transition period, and the ultimate post-Brexit world. If the FCA does indeed seek to review and amend the existing EU regulatory framework there will be significant opportunity for UK asset managers to launch differentiated investment products from those regulated under EU rules.
In perhaps the strongest insight thus far into the FCA’s intentions, Delfas confirmed their commitment to ensuring passporting will continue throughout the transition period. The FCA, however, only has control over permissioning in the UK. For example, if a UK manager wants to sell a fund into the EU, they would need to ensure they had a separate permission as a third-country entity, not an EU reciprocal member state. This is a positive sign for the industry because cross-border funds rely on passporting. Any restriction in passporting prevents managers from marketing cross-border and would force them to create a two-regime set of requirements.
Delfas recognized that firms are currently expected to address concerns over the post-Brexit certainty of derivative contracts by taking actions such as amending ISDA, and re-dating rolls and trades, however, she said the FCA’s preference is a “bilateral solution with the EU.” The FCA is part of the technical group set up by the Bank of England and the ECB reviewing contractual continuity. There is concern in the industry that £26 trillion worth of derivatives are at risk of becoming void, creating a liquidity “cliff edge” in the market. A bilateral solution would help prevent that.
Depending on the final negotiated agreement and transition period rules, the question could remain “what is the applicable law?” given EU financial services “law” is either a directive (such as AIFMD, where a member state country must implement it into their own laws) or a regulation (such as EMIR, where a member state country does not need to implement it into their own law). Therefore, those regulations that do not sit on the UK statute book raise the question as to what that means post-Brexit. Delfas addressed this disconnect and said the FCA is creating a statutory framework to cover the gaps in the law and will discuss them further this fall. The industry is anxious to see if the FCA will use this opportunity to achieve the status quo by not changing or adding any cost for firms or whether they will alter requirements, such as reporting criteria.
The EU regulatory framework is predicated on harmonization – without this firms must adapt their activity to satisfy the local requirement. To this end, many in the industry have asked for a declaration of “equivalence.” This would say UK rules may look and sound different but equate to the same thing.
Delfas made it clear the FCA will seek equivalence from day one. This is a relief. However, she also suggested they will evolve their regulatory framework, pushing the door wide open on a competitive jurisdictional approach to compete with the rest of the EU. We expect the FCA plans to try and make it more attractive to do business in the UK and seek the same exposure and investor base from the UK with a unique UK product, fund, or service.
“Neither the UK nor the EU want to see a significant misalignment in regulatory standards – nor indeed ‘a race to the bottom’ in regulatory standards,” she said. “But it is likely that after our exit from the EU, our regulatory frameworks may evolve.”