Global | Publication | July 2019
The roller-coaster that is Brexit continues for asset managers and in this update we set out recent key developments.
The March 29, 2019 deadline by which the UK was to leave the EU, as set by Article 50 of the Treaty on European Union, has come and gone and the UK remains in the EU. The end of March and early April saw frenetic political activity which culminated in the Article 50 process being extended until October 31, 2019.
With the extension of Article 50, the definition of "exit day" in the UK’s primary piece of Brexit legislation, the European Union (Withdrawal) Act 2018 (EUWA 2018) needed to change. Previously such amendment would have required a statutory instrument that would have been subject to the "affirmative procedure" requiring approval in the House of Commons. However, during its passage through Parliament the European Union (Withdrawal) Act 2019 amended the EUWA 2018 so that a statutory instrument changing exit day would be subject to the "negative procedure" whereby Parliament is not required to pre-approve it in order for it to become law. A statutory instrument laid under the negative procedure becomes law on the day a Minister signs it and automatically remains law unless a motion – or "prayer" – rejecting it is agreed by either House within 40 sitting days. Neither House rejected the amendment, so exit day has changed in the EUWA 2018.
To reduce the disruption that a no-deal Brexit would cause, the UK has put in place a temporary permissions regime (TPR) that will enable EU firms and funds that passport into the UK to continue operating in the UK for a limited period of time. For firms that are solely regulated by the FCA, the notification window to enter the TPR has been extended to the end of October 30, 2019.
The FCA has said that any fund managers that wish to update their submitted TPR notification before the new deadline, should email the regulator by the end of October 16, 2019 at the latest. The FCA has warned that while it will acknowledge requests to update notifications, it will not be possible to submit a new notification until after October 16, when the regulator will be in contact with details of the steps fund managers will need to take.
Section 13 of the EUWA 2018 provides that the UK Government is not be able to ratify the draft Withdrawal Agreement unless certain conditions are met which includes the draft Withdrawal Agreement and the Political Declaration on the future UK/EU relationship being approved by a resolution of the House of Commons and Parliament passing legislation to implement the draft Withdrawal Agreement itself.
So far the UK Government has been unable to gather sufficient support in the House of Commons to pass a resolution approving the exit deal. The UK Government lost so-called meaningful votes on January 15 and March 21. On March 28, it lost a House of Commons’ vote on approving the draft Withdrawal Agreement only.
There was speculation that the UK Government would try to bring forward a further meaningful vote in May but this did not occur. Instead, it appeared that the UK Government might instead focus on draft legislation that would implement the draft Withdrawal Agreement (the so called draft Withdrawal Agreement Bill). On 21 and 22 May, Prime Minister Theresa May made two speeches in which she referred to the Bill (which had not been published) and a ‘new Brexit deal’ which was framed around a 10-point offer which included a vote for MPs on whether the exit deal should be subject to a referendum.
However, the speeches were the catalyst for significant political drama. The Government’s Leader of the House of Commons, Andrea Leadsom MP, resigned shortly thereafter saying that she no longer believed that the UK Government’s approach would deliver Brexit. Several other cabinet ministers privately briefed the media that the 10-point offer was the end of the line for them. This extraordinary state of affairs led Theresa May to make a statement on May 24 in which she said that she would resign as leader of the Conservative Party on June 7 and remain Prime Minister until her successor was chosen.
A number of Conservative MPs put themselves forward for the leadership of the Conservative Party. After a series of votes by Conservative MPs only two candidates remain: Boris Johnson MP and Jeremy Hunt MP. These final two candidates are now subject to a postal ballet of Conservative Party members (the vote is not open to the UK general public, it’s restricted to people who are already members of the Conservative Party).
The next stages of the leadership contest timetable are
Throughout 2018 both the FCA and the PRA issued extensive consultations concerning the changes that need to be made to their rules and guidance in the event of a no-deal Brexit. On March 29, the FCA published the majority of the final instruments that contained the necessary amendments. The final instruments are generally unchanged from the near-final versions previously published in February except for minor amendments. A small sub-set of FCA binding technical standards were also published on April 18.
On April 18, the PRA also published the final versions of its policy materials for a no-deal Brexit including final instruments, supervisory statements and a statement of policy. Like the FCA, these were previously published as near final at the end of February.
Most of the statutory instruments made under the EUWA 2018 that onshore EU financial services legislation in a no-deal Brexit scenario have been made. These include the Benchmarks (Amendment and Transitional Provision) (EU Exit) Regulations 2019, the Uncertificated Securities (Amendment and EU Exit) Regulations 2019 and the Official Listing of Securities, Prospectus and Transparency (Amendment etc.) (EU Exit) Regulations 2019. Consolidated versions of UK financial services legislation, as amended by the statutory instruments, can be found on the Norton Rose Fulbright Brexit Pathfinder hub.
On March 26, 2019, the Association for Financial Markets in Europe (AFME) published a document containing wording setting out the selling restrictions for equity transactions for use following a no-deal Brexit or a Brexit with a deal/transitional period, as applicable. The wording within the document covers those selling restrictions that are most frequently used in practice. These comprise an EEA public offer selling restriction covering public offers in the EEA” (on “no deal” this means the EU 27 plus Iceland, Norway and Liechtenstein) and a new UK public offer restriction.
On June 12, 2019, the European Commission (Commission) adopted a communication on the state of play of preparations of contingency measures for a no-deal Brexit. The Commission has tabled 19 legislative proposals, 18 of which have been adopted by the European Parliament and Council. The Commission has also adopted 63 non-legislative acts and published 93 preparedness notices. In light of the extension of the Article 50 period, the Commission has screened these measures to ensure that they continue to meet their intended objectives. The Commission has concluded that there is no need to amend any substance of the measures as they remain fit for purpose. The communication also notes that the Commission does not plan any new measures ahead of exit day.
On 19 March 2019, the European Securities and Markets Authority (ESMA) published a statement on the impact of a no-deal Brexit on the trading obligation for shares under Article 23 of the Markets in Financial Instruments Regulation (MiFIR). Article 23 of MiFIR requires investment firms to conclude transactions in shares admitted to trading on a regulated market (RM) or traded on an EU trading venue on: (i) RMs, (ii) multilateral trading facilities, (iii) systematic internalisers; or (iv) third-country trading venues assessed as equivalent by the Commission.
The statement reviewed previous ESMA guidance on the trading obligation for shares and asserted that such guidance did not take into account the possible complications arising from a no-deal Brexit. In particular, given the strong ties and interconnections between the UK and the EU27 financial markets, ESMA argued that it could not reasonably be assumed that all shares admitted to trading on a UK RM are traded on a non-systematic, ad-hoc, irregular and infrequent basis in the EU27 and are therefore out of the scope of the trading obligation.
The statement went on to provide that for shares traded in the EU, Iceland, Liechtenstein, Norway and the UK, ESMA assumed that
ESMA also published a list of ISINs that, following the above approach, would be subject to the trading obligation for shares.
With respect to GB and EU27 shares that were or will be newly admitted to trading or traded for the first time on an EU27 trading venue after 1 January 2019, ESMA stated that the trading obligation should be applied to them based on the ISIN country code as described above.
In response the FCA acknowledged that clarifying the application of share trading obligations in the event of a no-deal Brexit would help to provide certainty, but that only a comprehensive and coordinated approach could provide the necessary certainty to market actors. The FCA argued that without this approach it would not be possible to address the issues of conflicting obligations applying to the same instruments. Where this was the case, firms might be limited to trading certain shares only in either the UK or the EU or in some cases be caught by overlapping obligations.
To avoid market disruption, the FCA called for further constructive dialogue with ESMA.
On May 29, 2019 ESMA released a further statement clarifying its position on the share trading obligation in a no-deal Brexit. In its view, all EU27 shares, i.e. ISINs starting with a country code corresponding to an EU27 Member State and, in addition, shares with an ISIN from Iceland, Liechtenstein and Norway were within the scope of the MiFIR share trading obligation and therefore must therefore be traded on an EU venue. According to ESMA, shares with a GB ISIN would be outside the scope of the MiFIR share trading obligation and instead must be traded on a UK venue in accordance with MiFIR as onshored by the UK (UK MiFIR). ESMA also noted that this approach would minimise disruption and avoid overlaps (provided the UK adopted an approach that did not include EU ISINs under the UK share trading obligation).
The FCA was encouraged by ESMA’s further statement but argued that applying an EU share trading obligation to all shares issued by firms incorporated in the EU would still cause disruption to investors and other market participants. The FCA pointed out that a number of shares with EU27 ISINs have both a listing, as well as their main or only significant centre of market liquidity, on UK markets. The FCA asserted that the ISIN that a share carries should therefore not determine the scope of the share trading obligation. The FCA added that ‘reciprocal equivalence’ would be the best way of dealing with the overlapping share trading obligations. In the absence of an equivalence determination, the FCA states that it will set out its approach if it is clear there will be a no-deal Brexit, including its expectations of how firms can comply with the applicable requirements.
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