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[...] Will City-based financial services groups continue to be able to “passport” their services into the rest of the EU under single market rules?
In the run-up to the EU referendum, most banks expressed a conviction that their London-based trading operations — which most of them use as hubs for serving clients from across the EU — would be at risk in the event of Brexit. For many, this was their biggest single argument for standing on the Remain side of the debate. If the “passport” allowing them to operate across the single market is revoked along with the UK’s exit from the EU, much of the logic for basing European operations in London evaporates.
But City of London optimists spent the weekend clinging to an abstruse chunk of EU legislation they believe could save them from chaos in the months and years ahead.
Under articles 46 and 47 of the new incoming Markets in Financial Instruments Regulation (MiFIR), many of the rights accorded to EU “passport” holders under the current regime can be extended to non-EU countries and their financial services groups.
The broader rule book governed by the new Markets in Financial Instruments Directive, or MiFID 2, comes into force, in January 2018. So, given that it would take a good two years for the UK to disentangle itself from the EU, the transition could be smooth.
Well, perhaps. But there are at least three serious caveats.
First, the MiFIR provisions relate only to segments of the businesses that currently benefit from passporting rights. Asset managers that have “UCITS” funds domiciled in the UK for distribution throughout the EU are not aided by the rules. Nor are insurers, such as Lloyd’s of London, who rely on passporting rules to deal with clients across the region. The securities trading part of banks’ operations would be covered, along with any “ancillary services”, such as margin loans. But straight corporate loans and other banking services, such as cross-border private banking, would not.
Second, whether or not the UK could take advantage of the MiFIR provisions is uncertain. In theory, it should be able to, because it meets the guideline for “equivalent” standards of regulation. But that could change. If, for example, Britain revokes the part of the EU bank capital rules that cap bankers’ bonuses — a rule that was as unpopular with British policymakers as it was with City bankers — the EU Commission, which must decide on MiFIR eligibility, could cry foul. There is also an element of political risk. Senior figures in France, such as Gérard Mestrallet, president of the Europlace lobby group, have already argued that UK-based entities should not be allowed to passport into the EU. They see a chance to boost Paris as a financial centre instead.
Third, there is no precedent to act as a guide. A similar provision in rules governing hedge funds and other specialist investors — the so-called Alternative Investment Fund Managers Directive — has not worked well, with regulators restricting its application unexpectedly. [...]
Full article on Financial Times (subscription required)