Brexit Broadcast – Brexit update – Financial Services

Interviewer: Simon Lovegrove, Head of Financial Services Knowledge – Global,  Norton Rose Fulbright

Interviewee: Peter Snowdon, Partner, Norton Rose Fulbright

Interviewer: Hello everyone and welcome to our latest Financial services video. In this video we are going to do a short update on Brexit. Peter, following the referendum result, we did a short video with Jonathan giving his immediate reaction to the result but given that a couple of months have now elapsed, what have you been seeing?

Interviewee: Well I think we’ve been seeing firms still quite uncertain about the future, obviously we don’t have any proposals from the government, we don’t know what Brexit will look like, we know Brexit is Brexit but actually we don’t know what that means in practical terms for firms, but firms are certainly looking – those firms that rely on passporting, both inward and outward are beginning to look at ways in which they need to manage their risk in future and a lot of firms are affected if you look at the FCA statistics we can see that there are almost thirteen and a half thousand firms passporting both in and out of the UK.

Interviewer: And firms have been doing a lot of mapping as well as regards to their activities and permissions.

Interviewee: That’s correct, I mean firms are looking at what they actually do in the UK or in Europe if they are passporting out of the UK, do they actually need passports? You know in some cases many firms have passports perhaps they are not really using, so they are mapping their businesses to try and understand what they need going forward and also regulators elsewhere in Europe are asking firms that have branches in London to map what they do in London so that they can understand what the implications are for those businesses as well.

Interviewer: Peter just keeping with passporting for the moment. In the market there has been some further consideration of the characteristic performance test, particularly reviewing some of the old source materials.

Interviewee: Yes that’s right, I mean the great thing about passporting of course under the directives is it covers a multitude of sins there are many different activities and you can just simply passport from one country to another. You will remember that prior to that very useful tool we used to focus a lot of the actual characteristics of the activity that was being undertaken, so people are beginning to look again and say well, where am I actually carrying on that activity if I am an investment manager am I just doing that in London? If I am a deposit taker am I just doing that in London? If I am providing investment advice where am I providing investment advice? Probably in the country of the person receiving the advice. So a lot of those old ideas and that old learning will probably need to be revisited in a post Brexit world.

Interviewer: And that learning was from a consultation by the securities investment board.

Interviewee: Some of it, yes there is some old SIB draft guidance, you know those of us that have been around for a while - you have knocking around – I mean the problem about some of this analysis by the way, it’s pretty much UK focused, not every country accepts the idea of characteristic performance, some of them look rather at a solicitation test, so it’s not going to be the silver bullet to sort out the passporting issue.

Interviewer:  And for the sake of completeness there was the commission communication as well.

Interviewee: There were, there are a couple of commission communications both with regard to banking and also with regard to insurance, they are quite old now and whilst they have some very interesting themes in them, I think one has to be a little bit cautious because they are internal market documents. Now, the commission gave its views and they are only the commissions views in those communications whether or not it would accept that they might have application outside the internal market, in other words to firms as our firms will be, the UK firms will be passporting in or trying to provide services in rather from outside the internal market, that’s a bit of an open question I think.

Interviewer: And just moving away from passporting now and the issue of equivalence. How far do you think equivalence will get the UK?

Interviewee: Equivalence is a difficult one because it has some limitations, there are one or two directives and regulations which have equivalence provisions within them, but there are other directives and in particular CRD 4 which don’t have equivalence provisions so they won’t work for all sorts of business. If I take - also if you just focus on one instrument where it does apply, that’s MiFIR, article 46 of MiFIR has an equivalence provision in it, I think the important thing to remember there is, that although there is a legal test, ultimately it is going to be a political decision, so you can go through all the legal process, you can assess a country as to whether or not it’s equivalent, at the end of the day it’s going to be a political decision as to whether or not a country is equivalent and I think when you introduce politics it introduces a lot of uncertainty for firms. The other thing I would say is of course that the UK will be a third country post Brexit but it will be one of a number of third countries and the benefit of equivalence provisions such as it is a benefit, will also apply to the United States, to South Africa, you know, Switzerland, whoever else it, so you know there are limitations around equivalence, it is not a silver bullet.

Interviewer: Peter as a final question there’s been a lot of talk in the market as regards possible transitional arrangements. What is your personal view on that?

Interviewee: Personal view is there have to be some sort of transitional arrangements. As we all know when you press the article 50 button you’ve got 2 years to sort out the treaty for the withdrawal from the European union. That simply isn’t enough time for firms to get themselves ready for a post Brexit world. Firms probably need – some of the larger operations will need possibly several years to accommodate the changes, maybe setting up businesses in other jurisdictions and so on, so the need for transitionals is essential, and those transitionals need to be something that people can rely on. They need to be firm, hard transitionals, sort of MOU’s between regulators isn’t going to give enough certainty to firms.

Interviewer: Thanks very much Peter, that concludes this Financial services video. Good bye.