What are the consequences of Brexit from a financial markets law perspective? Given that the precise form of Brexit is not yet known – is Britain going to choose the New York, Swiss, Turkish or any other conceivable model? – as of now, this question cannot be answered with full certainty. However, assuming that the UK chooses the New York model, ie a total exit, UK nationals will no longer be subject to generally applicable regulations and the UK will no longer be bound by directives. The UK will constitute a third country vis-à-vis the EU. Does this mean that European secondary legislation will be of no relevance whatsoever for the UK and its nationals? If the post-Brexit goal is to enable UK companies to obtain access to the European financial market, the answer is very likely to be no.
The Regulation of Intermediaries
In general, third country financial intermediaries, ie insurance companies, investment firms and credit institutions, must be authorised or have a branch in the member state they wish to operate in (Art. 2 (1) Solvency II; Art. 41 (1) MiFID II; Art. 47 (1) and (2) CRD IV). However, they will only receive that authorisation or be allowed to set up a branch in a member state if they satisfy substantive provisions of the respective piece of EU secondary legislation or if they are subject to national provisions which are equivalent to them (Art. 41 (1) lit. b MiFID II; Art. 37 (2) AIFM; Art. 162 (1), (2) lit. f Solvency II). Whether those UK financial intermediaries, once admitted to the market of a member state, will profit from a European passport or whether they will have to seek authorisation by every member state in which they want to operate, will depend on the piece of secondary legislation and the existence of supplementary agreements between the UK and the EU.
Furthermore, given that an EU UCITS may only invest in a third country UCITS with a level of protection for the unit holders which is equivalent to the one of the UCITS Directive (cf. Art. 50 (1) lit. e ii), it may further be recommended that the UK implement provisions that are somewhat equivalent to the UCITS Directive in order to make UK UCITS attractive for EU investors after Brexit. Similarly, an EU Credit Rating Agency (CRA) may only endorse a rating issued in a third country if the third country credit rating activity fulfils requirements which are at least as stringent as the ones provided for in the EU CRA Regulation (cf. Art. 4 (3) lit. b).
Disclosure in the Primary and Secondary Market
A UK company wishing to issue securities in the European Market will no longer benefit from the EU passport system when it comes to the issuing of prospectuses, ie prospectuses approved by UK authorities have to be approved by EU authorities. The latter will only be the case if the information contained in the UK prospectus is equivalent to the requirements of the Prospectuses Directive (cf. Art. 20 (1) (b)). In order to facilitate access of UK issuers to the European financial market, it may hence seem advisable to ensure that the UK provisions on prospectuses remain equivalent to the requirements of the directive. Once securities of UK companies are admitted to the EU market, they have to abide to the ongoing disclosure obligations of the Transparency Directive.
The Regulation of Market Misconduct and Derivative Contracts
Moreover, certain EU regulations are of extra-territorial effect. For instance, the Market Abuse Regulation (MAR) and the Short Selling Regulation (SSR) concern forms of market misconduct which affect financial instruments traded in the EU and may hence apply to actions in the UK after Brexit. Further, EMIR requires OTC derivative contracts between two entities, established in one or more third party countries, to be cleared if the contract has a direct, substantial and foreseeable effect within the Union (cf. Art. 4 (1) (a) (iv)).
If the UK government comes to the conclusion that continued access to the EU financial market is desirable, EU financial markets law will be of relevance in the UK in the post Brexit-era. It may hence be recommended that the UK legislator, as well as UK companies, not distance themselves too far from EU financial markets law.
Dörte Poelzig is Professor for Civil Law, German and International Business Law at the University of Passau. Max Bärnreuther is a Ph.D. candidate at the Chair for Civil Law, German and International Business Law at the University of Passau.