European Funds Comment: Preparing for Halloween 2019 … and beyond

31 May 2019
Issue 81
The UK’s Financial Conduct Authority announced last week that the new deadline for notifications to be made under its Temporary Permissions Regime (TPR) – designed to allow EU-based firms to operate seamlessly after Brexit – is 30 October 2019. That announcement (and a related one by ESMA) was recognition that 31 October is now the next possible date for a “hard Brexit”. Brexit could happen sooner than that, if the UK ratifies the draft Withdrawal Agreement negotiated last year. But the Withdrawal Agreement would guarantee continuity until at least 31 December 2020, and so would avoid (or at least defer) the need for a TPR.

In any case, the chances that Brexit will happen before 31 October now seem even more remote than they did a few weeks ago. The announcement by the British Prime Minister that she will step down in the summer, taken together with the results of last week’s European Parliament elections, has made imminent political compromise less likely. Parties that advocate a hard Brexit in October achieved over 30% of the vote (albeit on a turnout of around 37%), and those explicitly campaigning for a second referendum and a revocation of Brexit won around 40%, pushing the two main parties – Labour and Conservative, whose positions were somewhat ambiguous – into third and fifth places, respectively.

If it was hard to predict outcomes a year ago, the situation is certainly no clearer now. The ruling Conservatives are likely to elect a new leader, and therefore a new Prime Minister, who is willing to countenance a clean break this autumn, while Labour seems likely to move further towards explicit backing for a new referendum. If Labour’s position does harden, Parliament will probably have the numbers to vote down a hard Brexit. But there are plausible scenarios in which Parliament does not get its way, especially if the European Union decides not to offer any more time.

All of that means that UK-based firms must continue to prepare for a hard Brexit on Halloween, even those who continue to think it is unlikely. In truth, most firms were as ready as it is possible to be at the end of March, and those who held off implementing contingency plans earlier this year stand ready to pull the trigger in the autumn.

But, paradoxically, while the determination of the hard-liners to deliver Brexit hardens, the chances that the UK will never leave are also rising.

Amidst this chaos, some influential regulators have started to contemplate what might lie beyond Brexit for the UK. In two recent speeches – one by Andrew Bailey at the FCA, and the other by Sam Woods, CEO of the Prudential Regulation Authority – there were strong suggestions that, if left to their own devices, UK regulators would operate rather differently. Although it is clear that there will be no “bonfire of regulations”, and rulebooks will remain as stringent as they are now, for future regulatory projects the approach would be more in keeping with the common law tradition. Clear high-level objectives are set out in legislation, with adaptable and sector-specific rules made by the regulator. That approach is similar to that adopted in most of the world’s leading financial centres, but contrasts with the EU’s. For understandable reasons – the EU is trying to harmonise laws, and cannot allow 28 national regulators to craft their own rulebooks – Brussels tends to push most of its rules into rigid legislation. The UK’s regulators point to the Senior Managers and Certification Regime as a model for the future, and clearly regard AIFMD and MiFID II as case studies of how not to regulate.

Of course, this may be premature. Even if the UK does ultimately leave the EU, it would have to wait until the end of any transitional period to start ploughing its own regulatory furrow. And, even then, the UK might be bound to follow some or all EU rules as the price for market access. But if the hard Brexiteers do get their way this autumn, British regulators will have to work out quickly what to do with their regained autonomy, and many UK-based firms will approve of the likely new approach.