In Principle: 10 Things You Need To Know For 2017 |

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In Principle: 10 Things You Need To Know For 2017

The world of financial regulation after the UK referendum

On 23 June 2016, the UK shocked the world, and perhaps itself, when it voted in favour of a “Brexit” from the European Union. While the referendum result has brought significant uncertainty to the financial services sector, the Financial Conduct Authority (FCA) has made it clear that, from a regulatory perspective, it is “business as usual”. Indeed, it is clear that firms cannot afford to stand still in the wake of the referendum result, since financial regulation has, as always, continued to evolve.

In this publication, we focus on 10 key issues that authorised firms should be aware of going into 2017:

• Brexit – key challenges ahead for financial services firms

• FCA Mission Statement – a new mission for the FCA?

• MiFID II – a whistle-stop tour for investment managers

• extension of the Senior Managers and Certification Regime

• Market Abuse Regulation – market sounding guidance for buy-side firms

• mandatory clearing obligations under EMIR

• AIFMD – ESMA advice on non-EU AIFM passports and proposed changes to Annex IV reporting requirements

• increased regulatory scrutiny of the asset management industry

• regulation of distributed ledger technology-enabled financial services

• key takeaways from enforcement matters involving the FCA in 2016.

We begin by assessing the immediate challenges in the regulatory environment that Brexit would bring for financial services firms. We also examine the key themes in the FCA’s new mission statement, which we expect will form the foundation of the regulator’s 2017-2018 Business Plan.

We consider the key issues and upcoming developments that investment managers should be aware of as they go into a new year of business in 2017. In particular, we review the key issues for investment managers flowing from the implementation of the second Markets in Financial Instruments Directive (MiFID II), the extension of the Senior Managers and Certification Regime (SMCR) to all firms within the FCA’s regulatory perimeter, new European Securities and Markets Authority (ESMA) guidance for information recipients in market soundings, mandatory clearing requirements under the European Market Infrastructure Regulation (EMIR), ESMA advice on the extension of passporting arrangements to third country Alternative Investment Fund Managers (AIFMs) under the Alternative Investment Fund Managers Directive (AIFMD) and proposed changes to the Annex IV reporting requirements for non-EU AIFMs.

Further, we examine changes in the regulatory environment for asset managers, including the package of reforms proposed in the interim report to the FCA’s asset management market study. We also consider the prevailing regulatory thinking around the application of distributed ledger technology (DLT) in the financial services sector.

In addition, we reflect on the key takeaways from enforcement matters involving the FCA in 2016. Firms should be aware that the FCA appears to be placing increased focus on early intervention action, and we would expect this to continue in 2017. Further, it is clear from the cases brought by the FCA over 2016 that the regulator is continuing to punish firms for failings in relation to firm culture, market integrity, financial crime, and inadequate systems and controls. Although the FCA had brought very few cases against senior managers in 2016, we would expect this to change over the next few years since the regulator will no doubt begin to take action under the SMCR against banking firms (and eventually, non-banking firms).

All in all, although the financial sector has (understandably) been preoccupied with the potential ramifications of Brexit in the past year, firms must not lose sight of the myriad of regulatory change that is taking place in areas of EU financial regulation.

Firms are strongly encouraged to ensure that they are well-positioned to manage changes in the regulatory environment and to ensure that they are meeting regulatory expectations. The consequences of doing otherwise could be severe.


It is impossible to say with any certainty what the actual outcome and impact of Brexit will be, as nobody yet knows what the UK’s future relationship with the EU will look like. We have highlighted issues that we expect to have impact on firms sooner rather than later. Firms are encouraged to closely monitor developments in this area and to seek advice on how their particular business may be impacted by the UK’s departure from the EU.


Currently, UK-regulated firms can provide financial services across Europe through “passporting” arrangements. For example, MiFID provides a regime under which UK firms can provide investment services into the EU on a cross-border basis or through a branch without obtaining separate authorisation in each Member State in which they wish to do business. Similarly, under the Alternative Investment Fund Managers Directive (AIFMD), UK alternative investment fund managers can market EU-domiciled funds to professional investors across the EU without having to obtain approval in each Member State in which the fund is marketed.

Nearly 5,500 financial services firms passport their services out of the UK across the EU, while more than 8,000 firms passport their services from the EU into the UK.1 Within the banking sector, it is reported that 91 UK-incorporated banks (representing more than 95% of UK banks by assets and staff) rely on the existing passporting arrangements, while London’s investment banks use passporting for more than 20% of their total UK activities.2 According to Robert Rooney, chief executive of Morgan Stanley International, the loss of single market access would raise serious concerns as it could “result in higher costs, lower liquidity, more trapped capital and less efficient capital markets”.3

Although a hard Brexit with the loss of single market access would bring a high degree of uncertainty for UK firms that currently rely on their EU passports to provide financial services in Europe on a crossborder basis, firms need to be aware that it may not necessarily mean they must relocate to, or otherwise establish a subsidiary in, a remaining Member State in order to continue providing financial services across the EU.

Both the MiFID II and AIFMD regimes contemplate the possibility of extending passports to thirdcountry firms (which will include UK firms once the UK is no longer a part of the EU) in certain circumstances. Under the MiFID II regime, where the European Commission has determined that the legal and supervisory arrangements of a third country have “equivalent effect” to the requirements of MiFID II, third country firms from that jurisdiction are able to register with ESMA to provide investment services and perform investment activities throughout the EU. Similarly, the AIFMD contains a mechanism that enables the European Commission to extend the AIFMD passport to non-EU managers if ESMA advises that there are no significant obstacles regarding investor protection, market disruption, competition or the monitoring of systemic risk impeding the extension of the AIFMD passport to the relevant third country (we discuss this in more detail later).

Although nothing in this process is certain, it is worth noting that, at the point of departure from the EU, the law in the UK will not only have equivalent effect to that in the EU, but will in fact be exactly the same. As such, it is difficult to conceive a scenario in which the EU could justify that regulatory equivalence does not exist. However, much will depend on the appetite of the EU to ensure that the UK can maintain its financial services base.


Brexit is estimated to add between £14 billion - £20 billion in regulatory costs for firms over 10 years.4 Although the FCA has said that firms need to continue with their implementation plans for European legislation that has not yet come into effect (e.g., MiFID II), it is likely that at least some implementation costs borne by UK firms will be duplicated, as firms will need to try to anticipate the impact of Brexit on the application of new legislation in addition to navigating through the legislation itself.5

UK regulatory influence

Post-Brexit, it is likely that the UK’s influence on financial regulation at the European level will diminish. The FCA has tacitly acknowledged this, noting recently in its Board meeting that it is making international engagement with a view to influencing global standards a priority.6 The UK regulators have historically been leaders in the drafting of financial services regulation, and it remains to be seen how the European authorities will approach this in the absence of a strong UK voice.

What does this mean for UK-regulated firms?

The Prime Minister has said that she will trigger Article 50 (the clause needed to start the Brexit process) by the end of March 2017, which means the UK may leave the EU by mid-2019. However, the High Court’s decision in R (Gina Miller and Deir Tozetti Dos Santos) v The Secretary of State for Exiting the European Union7 casts uncertainty about the timing of Brexit8 and, at the time of writing, the Government has provided little clarity around the type of post-Brexit relationship that the UK is seeking with the EU.

Regardless of the form of post-Brexit relationship the UK will have with the EU, we believe it is likely that UK financial institutions will find a way to maintain a relationship with Europe. For now, UK firms should consider how much reliance their business places on passporting. They should also consider how alternative scenarios resulting from Brexit (particularly in the context of passporting) should feed into their contingency planning and risk management, and closely monitor the Government’s negotiations with Europe.

FCA Mission Statement - a New Mission for the FCA?

On 26 October 2016, the FCA published a Mission Statement entitled Our Future Mission. The Mission Statement is described by Chief Executive Andrew Bailey as a “flagship” piece and is his first major initiative since taking on his current role in June 2016.

Firms should be aware of the key themes coming out of the Mission Statement, as it is anticipated that the FCA will use the Mission Statement as guidance in its next Business Plan. Through the Mission Statement, the FCA is seeking to “start a discussion to decide how we can make the biggest difference in making markets work well, now and in the future”. The aim of the publication is to “establish a set of guiding principles” that explain how the FCA pursues its strategic and operational objectives and decides on its priorities and the tools used to deliver them. The FCA has sought comments on the Mission Statement by 26 January 2017.

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