Brexit and financial services: 10 things you should know (Part III)

With financial services firms still coming to grips with the UK’s referendum decision to leave the EU there continues to be a sense of a journey into the unknown. In this latest financial services briefing we take a look at recent events including the forthcoming publication of the Great Repeal Bill and then focus on the concept of ‘equivalence’ which has become a key issue for financial institutions.

01 | Article 50 notification: ratification by Member States?

The right of a Member State to withdraw from the European Union (EU) is set out in Article 50 of the Treaty on European Union (TEU). Importantly, Article 50 does not establish any substantive conditions for a Member State to be able to exercise its right to withdraw, but only procedural requirements.

The recent opposition from Belgian politicians concerning the Canadian / EU trade agreement has focused the spotlight on whether individual Member State ratification would be needed for the UK’s exit arrangements. A European Parliament briefing paper (February 2016) addresses this point stating that unlike the accession of a new Member State to the EU, the withdrawal of a Member State does not require ratification by the remaining Member States. Article 50(1) of the TEU refers to the decision of the withdrawing Member State in accordance with its constitutional requirements. However, Treaty changes or international agreements (such as a trade agreement) that might be the product of the withdrawal agreement may need to be ratified by the remaining Member States in accordance with Article 48 of the TEU. The European Parliament briefing paper also mentions that at the very least Article 52 of the TEU on the territorial scope of the Treaties (which lists the Member States) would need amendment and the Protocols concerning the withdrawing Member State would also need to be revised or repealed.

02 | The Great Repeal Bill

The European Communities Act 1972 (ECA 1972) legislated for the accession of the UK to the European Economic Community, the European Coal and Steel Community and the European Atomic Energy Community. These institutions would later form part of the EU and the ECA 1972 has since been amended to give legal effect to the Single European Act, the Maastricht Treaty (which formed the EU) and the Treaty of Lisbon. The ECA 1972 also legislated for the incorporation of EU law into the UK’s domestic law.

On 10 October 2016, the Secretary of State for the Department for Exiting the EU, David Davis MP, gave an oral statement to the House of Commons on how the Government plans to reflect the UK’s withdrawal from the EU on the statute book. Mr Davis said that the Government would bring forward a ‘Great Repeal Bill’ that would mean the ECA 1972 would cease to apply on the day the UK leaves the EU.

What will happen to the large body of EU law that the UK is currently subject to remains to be seen. However, it appears that much of it may remain in place. Mr Davis said in his statement:

“The Great Repeal Act will convert existing EU law into domestic law, wherever practical. That will provide for a calm and orderly exit and give as much certainty as possible to employers, investors, consumers and workers.”

However, later in his statement Mr Davis suggested that the UK would not retain every piece of EU legislation by stating:

“There is over 40 years of EU law in UK law to consider in all, and some of it simply won’t work on exit. We must act to ensure there is no black hole in our statute book.”

In addition, on the day the UK leaves the EU it will no longer be bound by the judgments delivered by the European Court of Justice (ECJ). Mr Davis stated that:

“As a result, we have had to abide by judgments delivered by the ECJ in their interpretation of EU law. The Great Repeal Bill will change that with effect the day we leave the EU.”

The Great Repeal Bill will be introduced in the next Parliamentary session.

03 | High Court rules on Article 50 challenge

Following a three-day hearing in October, a panel of three senior judges, comprising the Lord Chief Justice, Master of the Rolls and Lord Justice Sales, handed down judgment in the High Court on 2 November ruling that Article 50 cannot be triggered by the Government without the approval of Parliament.

The Government had argued that it has a unilateral right to trigger Article 50 pursuant to prerogative powers, which it argued applied in relation to the making or breaking of international treaties. In contrast, the claimants’ position was that prerogative powers cannot be used to override existing Acts of Parliament (in this case the ECA 1972), or to remove fundamental rights of UK citizens which currently exist under EU law. The claimants’ submissions included reference to the Bill of Rights 1689, which it was argued “expressly prohibits the use of the prerogative in circumstances where its exercise would ‘suspend’ or ‘dispense’ statutory law”.

In a decisive and unanimous judgment, the High Court determined that the Government cannot use the prerogative powers to notify the EU of the UK’s decision to invoke Article 50.

The three judges were clear that as a matter of UK constitutional law, the question of whether the Government can use the royal prerogative to trigger Article 50 was one of domestic law and justiciable.

The claimants’ principal submission had been that the Government could not change domestic law and nullify rights under the law unless Parliament had conferred upon the Government authority to do so either expressly or by necessary implication by an Act of Parliament. Accordingly, it came down to a question of interpretation of the ECA 1972 in light of the relevant constitutional principles.

The High Court noted that “the powerful constitutional principle that the Crown [Government] has no power to alter the law of the land by use of its prerogative powers is the product of an especially strong constitutional tradition in the United Kingdom…” (para.86). Moreover, the Court concluded that the ECA 1972 “cannot be regarded as silent on the question of what happens to EU rights in domestic law if the Crown [Government] seeks to take action on the international plane to undo them. Either the Act reserves power to the Crown [Government] to do that, including by giving notice under Article 50, or it does not. In our view, it clearly does not” (para.94).

The High Court concluded that the ECA 1972 confers no such authority either expressly or by necessary implication. Accordingly, the Government cannot “through the exercise of its prerogative powers alter the domestic law of the UK and modify rights acquired in domestic law under the ECA 1972 or other legal effects of that Act. We agree with the claimants that, on this further basis, the Crown [Government] cannot give notice under Article 50(2)” (para.96).

Even before the judgment, it was anticipated that whatever the finding, the result would be appealed and it is expected that this will take the form of a “leapfrog” appeal directly to the Supreme Court. Such appeal is likely to be heard in December in view of the earlier statement by Prime Minister Theresa May that the Government intends to trigger Article 50 before the end of March 2017. Before the decision was handed down, there had been some speculation that the Government would not appeal if it lost, but would instead introduce legislation for Parliament to vote on invoking Article 50 on the basis that MPs would feel compelled to respect the referendum result. However, following the handing down of judgment the Government’s counsel sought a certificate enabling the Government to appeal, which was granted and, shortly afterwards, the Government indicated that it would indeed appeal.

04 | Equivalence generally

The appearance of equivalence provisions in EU legislation is relatively new following the financial crisis of 2008. Not all pieces of EU legislation contain such provisions. However, where EU legislation contains such provisions (for example the Markets in Financial Instruments Regulation (MiFIR), the European Market Infrastructure Regulation (EMIR) and the Benchmarks Regulation (BMR)) UK firms have started to review them as part of their preliminary analysis of Brexit. However, one of the challenges facing firms is that some of the equivalence provisions have not been used before.

Understanding what pieces of EU legislation contain equivalence provisions is the first step of the analysis. On its website the European Commission (Commission) updates fairly regularly an overview table setting out EU legislation that has equivalence provisions and whether an equivalence determination has been made. The table can be found at the bottom of the Commission’s webpage on equivalence, here.

Importantly, it is the Commission that determines equivalence following receipt of technical advice from the appropriate European Supervisory Authority (ESA). To some extent this means that an equivalence determination is a political decision. In addition, such determinations, when granted, can be removed should a third country introduce a new legislative provision that is not matched on the other side.

05 | Equivalence under MiFIR

Both MiFID II and MiFIR come into force in the EU on 3 January 2018. The FCA has made it clear to UK firms that they should continue with their MiFID II / MiFIR implementation plans.

Article 28 of MiFIR provides that sufficiently liquid derivatives that are subject to the clearing obligation must be traded on authorised and supervised trading venues (i.e. be subject to a ‘trading obligation’). Furthermore, such transactions shall also be cleared by a central counterparty (CCP). For the purposes of this obligation, EU firms may use third country trading venues provided that:

• the Commission has adopted an equivalence decision determining that the legal and supervisory framework of a third country ensures that a trading venue authorised in that third country complies with legally binding requirements that are equivalent to the requirements for EU trading venues and which are subject to effective supervision and enforcement in that third country; and
• the third country provides for an effective equivalent system for the recognition of EU trading venues to admit to trading or trade derivatives declared subject to a trading obligation in that third country on a non-exclusive basis.

In this regard, the following specific standards apply:

• the legal and supervisory framework of a third country is considered to have equivalent effect where that framework fulfils the following conditions:
  • trading venues in that third country are subject to authorisation and to effective supervision and enforcement on an on-going basis;
  • trading venues have clear and transparent rules regarding admission of financial instruments to trading so that such financial instruments are capable of being traded in a fair, orderly and efficient manner, and are freely negotiable;
  • issuers of financial instruments are subject to periodic and ongoing information requirements ensuring a high level of investor protection; and
  • it ensures market transparency and integrity via rules addressing market abuse in the form of insider dealing and market manipulation
• a decision of the Commission may be limited to a category or categories of trading venues.

MiFIR also sets out an equivalence framework with regard to the authorisation and supervision of investment firms (Articles 46 to 49). The Commission may adopt a decision in relation to a third country stating that:

• the legal and supervisory framework of a third country ensures that firms authorised in that third country comply with legally binding prudential and conduct of business requirements that have equivalent effect to MiFIR and MiFID II; and
• the legal framework of that third country provides for an effective equivalent system for the recognition of investment firms authorised under third-country legal regimes.

The consequence of such decision of equivalence is that, at the end of a transitional period of three years, a third country firm may provide investment services or perform investment activities, including in relation to derivatives, to eligible counterparties and to per se professional clients established throughout the EU without the obligation to establish a branch (although prior direct registration with the European Securities and Markets Authority (ESMA) is required).

The prudential and conduct of business framework of a third country may be considered to have equivalent effect where the following conditions are fulfilled:

• firms providing investment services or performing investment activities in that third country are subject to authorisation and to effective supervision and enforcement on an ongoing basis;
• firms providing investment services or performing investment activities in that third country are subject to sufficient capital requirements and appropriate requirements applicable to shareholders and members of management bodies;
• firms providing investment services or performing investment activities are subject to appropriate conduct of business rules; and
• it ensures market transparency and integrity by preventing market abuse in the form of insider dealing and market manipulation.

MiFID II provides for a ‘branch passport’ which is available to third country firms servicing retail clients and opted-up professional clients. However, this regime is optional for Member States and subject to the exercise of national discretion. It also does not require the Commission to conduct an equivalence determination of the third country’s regulatory regime. However, MiFIR provides that branches authorised pursuant to MiFID II may provide investment services to eligible counterparties and per se professional clients across the EU, provided their third country legal and supervisory framework has been determined by the Commission as equivalent.

No equivalence determinations have so far been made by the Commission under MiFIR.

06 | Equivalence under EMIR

A CCP established outside the EU may provide clearing services to EU clearing members where it has been recognised by ESMA. Such recognition requires beforehand a Commission implementing act under Article 25(5) of EMIR determining that:

• the legal and supervisory regime in the third country in which the CCP is established comply with legally binding requirements that are equivalent to the one laid down in EMIR;
• that those CCPs are subject to effective on-going supervision and enforcement in the third country; and
• that the legal framework of that third country provides for an effective equivalent system for the recognition of CCPs authorised under third-country legal regimes.

The main conditions to the recognition of third country CCPs by ESMA are:

• the Commission has adopted a positive equivalence decision with regard to the regulatory framework applicable to CCPs in the third country;
• the CCP is authorised and subject to effective supervision and enforcement in its home third country;
• the CCP is established or authorised in a third country that is considered as having equivalent systems for anti-money laundering and combating the financing of terrorism to those of the EU in accordance with the criteria set out in the common understanding between Member States on third country equivalence under the Third Anti-Money Laundering Directive; and
• cooperation arrangements have been established between ESMA and the relevant third country supervisory authorities covering supervisory arrangements and the sharing/notification of information.

Once recognised, the CCP is required only to comply with the rules of its home jurisdiction. EU authorities do not apply any direct oversight over third country CCPs.

EMIR also provides that a trade repository (TR) established in a third country that intends to provide services and activities to entities established in the EU must be recognised by ESMA. Such recognition requires beforehand a Commission implementing act under Article 75(1) of EMIR determining that:

• the legal and supervisory regime in the third country in which the TR is established comply with legally binding requirements that are equivalent to the one laid down in EMIR;
• those TRs are subject to effective ongoing supervision and enforcement in the third country; and
• guarantees of professional secrecy exist that are at least equivalent to those of EMIR.

In addition, EMIR requires that the Commission execute agreements with third country regulators ensuring access to data in the recognised TR. ESMA must establish agreements with the relevant third country authorities regarding exchange of information and coordinated supervision.

Once recognised, the TR is required only to comply with the rules of its home jurisdiction. EU authorities do not apply any direct oversight over third country TRs.

The Commission has adopted a number of equivalence determinations for the third country regulatory regimes for CCPs. The most recent determination was the most notable being the United States on 15 March 2016. Before that the Commission made equivalence determinations for Canada, Mexico, South Africa, Switzerland and the Republic of Korea on 13 November 2016 and for Australia, Hong Kong, Japan and Singapore on 30 October 2014.

So far the Commission has not adopted an implementing act determining the equivalence of third country TRs under Article 75(1) of EMIR. However, it is worth noting that on 26 November 2015, ESMA entered into a Memorandum of Understanding (MoU) with the Hong Kong Securities and Futures Commission (SFC) to allow the exchange of information on derivative contracts held in TRs. Unlike the MoUs entered into between ESMA and the Australian Securities & Investments Commission in November 2014 and the Reserve Bank of Australia in February 2015, which provided for direct access to trade repository data, the SFC / ESMA MoU allows both authorities to have indirect access to TRs established in their respective jurisdictions through exchanges of information.

Also, on 12 July 2013, the Commission adopted a Delegated Regulation to include the central banks and debt management offices of Japan and the United States in the list of exempted entities under Article 1(4) of EMIR, in line with a report prepared by the Commission on 22 March 2013.

07 | Equivalence under CRR/CRD IV

In terms of third country provisions it is worth noting that:

• Article 107(3) of the Capital Requirements Regulation (CRR) allows ‘EU institutions’ (EU credit institutions and EU investment firms) to treat exposures to third country investment firms, third country credit institutions and third country exchanges as exposures to ‘EU institutions’ only if the third country applies prudential and supervisory requirements to the entity concerned which are at least equivalent to those applied in the EU;
• Articles 114(7), 115(4) and 116(5) of the CRR then set specific risk weights applicable to exposures to central governments, central banks, regional governments, local authorities and public sector entities located in third countries that apply supervisory and regulatory requirements at least equivalent to those applied in the EU;
• Article 153 of the CRR also lays down the formula for the calculation of the risk weighted exposures amounts to corporates, institutions, central governments and central banks under the internal-ratings based approach and details the parameters to be used for the calculation, including the coefficient of correlation;
• Article 153(2) of the CRR sets the coefficient of correlation applicable to large financial sector entities; and
• According to Article 142(1)(4)(b) of the CRR, in order to qualify for the definition of ‘large financial sector entity’, the financial sector entity or one of its subsidiaries must be subject to the laws of a third country applying prudential supervisory requirements at least equivalent to those applied in the EU.

On 2 June 2015, the European Banking Authority published a questionnaire that was designed to facilitate the collection of data and guide the assessment of third country jurisdictions’ equivalence with the EU prudential, supervisory and regulatory requirements specified in the CRR and the CRD IV. The questionnaire stated that the assessment would be mostly qualitative and outcome-based and consider the major features of the relevant supervisory and regulatory framework. Along these lines, the equivalence of the third countries’ regulatory and supervisory framework implied sharing the same objectives as the EU’s framework (i.e. ensuring appropriate regulation and supervision, and ultimately financial stability). In addition, the domestic regulation of third countries were to be assessed for their compliance with the EU requirements according to the materiality of any deviations from the EU framework.

On 12 December 2014, the Commission published its first implementing act determining equivalence for the purposes of assigning risk weights under Articles 107, 114, 115, 116 and 142 of the CRR. This implementing act was subsequently amended on 17 February 2016. The countries listed as equivalent are as follows:

• equivalence of requirements applied to credit institutions for the purposes of Article 107(4) of the CRR: Australia, Brazil, Canada, China, Guernsey, Hong Kong, India, Isle of Man, Japan, Jersey, Mexico, Monaco, Saudi Arabia, Singapore, South Africa, Switzerland and the USA;
• equivalence of requirements applied to investment firms for the purposes of Article 107(4) of the CRR: Australia, Brazil, Canada, China, Hong Kong, Indonesia, Japan (limited to Type I Financial Instruments Business Operators), Mexico, South Korea, Saudi Arabia, Singapore, South Africa and USA;
• equivalence of requirements applied to exchanges for the purposes of Article 107(4) of the CRR: Australia, Brazil, Canada, China, India, Indonesia, Japan, Mexico, South Korea, Saudi Arabia, Singapore, South Africa and USA;
• equivalence of requirements applied to exposures to central government, central banks, regional governments, local authorities and public sector entities for the purposes of Articles 114, 115 and 116 of the CRR: Australia, Brazil, Canada, China, Guernsey, Hong Kong, India, Isle of Man, Japan, Jersey, Mexico, Monaco, Saudi Arabia, Singapore, South Africa, Switzerland and the USA; and
• equivalence of requirements to credit institutions and investment firms for the purposes of Article 142 of the CRR: credit institutions - Australia, Brazil, Canada, China, Guernsey, Hong Kong, India, Isle of Man, Japan, Jersey, Mexico, Monaco, Saudi Arabia, Singapore, South Africa, Switzerland and the USA; investment firms - Australia, Brazil, Canada, China, Hong Kong, Indonesia, Japan (limited to Type I Financial Instruments Business Operators), Mexico, South Korea, Saudi Arabia, Singapore, South Africa and USA.

08 | Equivalence under the Benchmarks Regulation

Most of the provisions of the BMR apply from 1 January 2018. The UK will be subject to the BMR on the basis that at the very least it will still be a member of the EU on this date, being in the middle of its Brexit negotiations.

The BMR foresees three parallel regimes relating to the use by ‘supervised entities’ (as defined in Article 3(1) of the BMR which includes MiFID II investment firms and CRR credit institutions) in the EU of benchmarks provided by an administrator located in a third country. These regimes can be summarised as follows:

• equivalence (Article 20 of the BMR). Benchmarks provided by an administrator in a third country may be used by supervised entities in the EU provided that, inter alia: (i) the Commission has adopted an equivalence decision; and (ii) ESMA has established cooperation arrangements with the authorities in the third country. However, in order to avoid the adverse impacts of a possible abrupt cessation of the use in the EU of benchmarks provided from a third country, the BMR also provides for two other mechanisms (recognition and endorsement);
• recognition (Article 21a of the BMR). Until such time as an equivalence decision is adopted, third country benchmarks may be used in the EU provided that the administrator obtains prior recognition. Recognition is granted at the national level by the Member State competent authority of reference determined in accordance with the rules set out under Article 21a(4) of the BMR. In order to gain recognition there are certain requirements including that the benchmark administrator has to ensure compliance with some of the material requirements of the BMR. Another important requirement is the establishment of cooperation arrangements between the Member State competent authority of reference and the competent authority in the jurisdiction where the third country administrator is established; and
• endorsement (Article 21b of the BMR). An administrator located in the EU and authorised or registered in accordance with Article 23 or any other supervised entity located in the EU with a clear and well defined role within the control or accountability framework of the third country administrator which allows such person to effectively monitor the provision of the benchmark, may apply to its competent authority to endorse a benchmark or a family of benchmarks provided in a third country for their use in the EU, provided that, inter alia, the provisions of the benchmark or family of benchmarks fulfils requirements, on a mandatory or on a voluntary basis, which are at least as stringent as the requirements set out in the BMR. Where endorsement is given, the administrator or supervised entity that has endorsed the benchmark or family of benchmarks remains fully responsible for them and their compliance under the BMR.

It is worth noting that ESMA has a number of tasks in the context of the third country regime. After the Commission has made a positive equivalence determination, ESMA will have to establish cooperation arrangements with the competent authority of the third country. In the case of recognition, if a Member State competent authority considers that the third country benchmark administrator may be exempted from some requirements, ESMA will have to advise the competent authority about the application of the exemption to that third country administrator. ESMA is also to review every two years each recognition and endorsement granted by Member State competent authorities and issue an opinion assessing the continued compatibility of the recognition / endorsement with all the applicable requirements under the BMR.

No equivalence determinations have so far been made by the Commission under the BMR.

09 | How equivalent should equivalence be?

One of the key questions that is often asked is how equivalent does the regulatory regime of a third country have to be in order to receive a positive equivalence determination from the Commission? Interestingly, the recitals to MiFIR answer this question for an equivalence assessment under that Regulation.

Recital 41 of MiFIR states that “the equivalence assessment should be outcome-based; it should assess to what extent the respective third-country regulatory and supervisory framework achieves similar and adequate regulatory effects and to what extent it meets the same objectives as EU law.”

In other words, the purpose of the equivalence assessment under MiFIR is to verify that the regulatory framework applicable to investment firms in the third-country delivers equivalent results and that the relevant third country provides for an effective equivalent system for the recognition of investment firms. This assessment may not be aimed at checking that the rules in the third country are identical to the EU rules but rather it is outcomes focussed and takes as much possible account of the specificities of the regulatory context in the third country, including the nature of the relevant markets. In order to do this, the exercise will involve the regulatory authorities of the third country being closely involved with the equivalence process so that the functioning and the specificities of its local market can be understood and to understand not only the substance of the regulatory framework but the overall outcomes of it.

10 | The procedure for a Commission equivalence determination

The procedure that the Commission will follow to determine third country equivalence is set out in the subject matter Directive or Regulation. For example, for:

• MiFIR – see articles 28, 47 and 51;
• EMIR – see articles 25, 75, 86;
• CRR – see articles 107(4), 114(7), 115(4), 116(5), 132(3), 142(2) and 464; and
• BMR – see articles 30(3) and 50.

All of these provisions refer to an examination procedure set out in Article 5 of Regulation (EU) No.182/2011 of 16 February 2011 laying down the rules and general principles concerning mechanisms for control by Member States of the Commission’s exercise of implementing powers (the Procedure Regulation).

Under the examination procedure a committee will be formed comprising of representatives from the Member States. The committee will also be chaired by a representative of the Commission although this person will not take part in any committee vote. Article 51 of MiFIR provides that this committee will be the European Securities Committee. Article 86 of EMIR and Article 50 of the BMR does the same. Article 464 of the CRR does not specify.

The Procedure Regulation provides that the committee will deliver an opinion on the draft implementing act that contains the Commission’s decision on third country equivalence. The opinion is delivered by majority vote according to Article 16(4) and (5) of the TEU and, where applicable, Article 238(3) of the Treaty on the Functioning of the European Union (TFEU) for acts to be adopted on a proposal from the Commission. The votes of the representatives of the Member States within the committee shall be weighted in the manner set out in those Articles.

Article 16(5) of the TEU deals with transitional provisions that are no longer in effect. Article 16(4) of the TEU provides that a qualified majority shall be defined as at least 55 per cent of the members of the Council of the EU, comprising at least fifteen of them and representing Member States comprising at least 65 per cent of the population of the EU. A blocking majority must include at least four Council members, failing which the qualified majority shall be deemed to be attained. The other arrangements governing the qualified majority are laid down in Article 238(2) of the TFEU.

Where the committee approves a positive opinion on the draft implementing act, the Commission will adopt it. However, where the committee produces a negative opinion the Commission will not adopt the draft implementing act. Where the implementing act is deemed necessary, the chairman of the committee may either submit an amended version of the draft implementing act to the same committee within two months of delivery of the negative opinion, or submit the draft implementing act within 1 month to an appeal committee for further deliberation. Where no opinion is delivered, the Commission may, in limited circumstances, adopt the draft implementing act. However, it is precluded from doing so where the implementing act relates to key EU areas like taxation and financial services. There is one derogation from the above where the committee delivers a negative opinion. In this instance, the Commission may still adopt the draft implementing act but only where such adoption is needed without delay in order to avoid creating a significant disruption of the markets in the area of agriculture or a risk for the financial interests of the EU within the meaning of Article 323 TFEU. In such instances the Commission will immediately submit the adopted implementing act to an appeal committee. Where the appeal committee delivers a negative opinion on the adopted implementing act, the Commission shall repeal the implementing act immediately. Where the appeal committee delivers a positive opinion or no opinion is delivered, the implementing act remains in force.

One of the recitals in the Procedure Regulation notes that the European Parliament and the Council of the EU should be promptly informed of committee proceedings on a regular basis. In addition, Article 11 of the Procedure Regulation provides that either the European Parliament or the Council may at any time indicate to the Commission that, in its view, a draft implementing act exceeds the implementing powers provided for in the subject matter Directive or Regulation. In such instances, the Commission will review the draft implementing act, taking account of the positions expressed, and will inform the European Parliament and the Council of the EU whether it intends to maintain, amend or withdraw the draft implementing act.

Conclusion

Given that the UK’s current regulatory regime is based on EU rules and the UK appears to have committed itself to implement future EU requirements like MiFID II and MiFIR, it seems likely that there will be few obstacles to the UK achieving a positive equivalence determination from the Commission. However, this assumes that EU rules are generally grandfathered on Brexit.

But as mentioned above equivalence is an on-going process. For example, in recital 41 of MiFIR it is stated that the Commission shall monitor any significant changes to the regulatory and supervisory framework of a third country and review any positive equivalence determination where appropriate. Article 47(4) of MiFIR also envisages the position where the Commission withdraws a positive equivalence determination. If changes are subsequently made to EU laws post Brexit the UK would be required to show that similar outcomes were being achieved in its own regime from a systemic risk perspective. The UK may also have to adopt a cautious approach when adopting new legislation which may require prior consultation with the EU in order to preserve any positive equivalence determinations. Whether the UK would be happy to have this legislative restriction placed upon it remains to be seen.