Now that the UK have decided on their next Prime Minister, the future is clear. The UK will leave the EU at the latest, in 2022 and investors and financial services will need to prepare for what’s to come.

While a “no deal Brexit” is not looking likely, it is still possible. Which means that we must prepare for the possible moment when passporting for financial services between the UK and EU would stop. UK regulators have already made no deal preparations with a temporary permissions regime which would allow firms that passport into the UK on exit day to continue to carry on regulated activities for a short time while pending authorisation. Many of the EU27 member states have their own transition regime which would allow UK firms to continue servicing their clients for some time.

If the Withdrawal Bill is ratified in the UK and EU parliaments, the UK would enter a transition period where all rights and obligations of EU membership would continue until 30^th June 2020. This is the deadline under the Withdrawal Agreement for the EU and UK to decide whether to have a one-off extension of one or two years to the transition period.

2020 will likely be about securing a UK-EU free trade deal where the Political Declaration envisages that the EU and UK will seek to endeavour equivalence assessments in the financial services 2020. The end of the transition period, whether that’s December 2020, 2021 or 2022 (depending on how long and if the transition period is extended), is going to be an important date for the financial services sector.

After leaving, attention will be on the divergence of UK and EU regulations. As Linklaters puts it:

“Just as the EU will have power to deem the UK regulatory regime equivalent to the EU regime in certain areas, the UK Treasury will have power to deem the EU regulatory regime equivalent, and equivalence frameworks and assessments may change over time.”

MiFID II and MiFIR

If you think you’re sick of hearing about MiFID II, think again! MiFID II and MiFIR are approaching their second year and that’s not to say these regulations won’t be important in 2020. Local regulators will likely increase their supervisory focus and pay more attention to failures in transaction reporting. Those LEIs are more important than ever!

The European Commission is conducting a review and that may well lead to changes in the regulation in 2020. The German Ministry of Finance published some recommended changes to the regulation which could be finalised as soon as the second half of 2020 but at the moment, it is unclear whether any of these changes can take place in 2020 as some are linked to wider and more complex issues. For example, the issue of creating a consolidated tape is linked to the wider issues of charging for and access to market data.

Where Brexit might make this regulation rather tricky is in EU share trading obligations clashing with UK share trading obligations including areas such as; potential multiple transaction reporting requirements, trade transparency requirements in chains which straddle both markets and the extent to which substituted compliance assists EU firms continuing to access the UK market under the temporary permissions regime.

EMIR

With EMIR now in force, 2020 will be a year where we will expect further changes to the regulation including mandatory reporting. EMIR 2.2 is expected to come into force in early 2020 with some changes to the CCP supervision.

More specifically, from the 18^th June 2020, Financial Counterparties or FC’s that are entering into Over the Counter (OTC) derivatives with Non-Financial Counterparties (NFCs) will be required to report the transactions on behalf of the NFC, under mandatory reporting requirements. EU fund managers will also be required to report on funds form that date. Since an NFC is required under EMIR, it’s likely that FCs will want to put together agreements with NFC’s.

In the event of a no deal Brexit, EU legislation will only be onshored to the extent it is in force at the time. Changes to EMIR, such as EMIR 2.2 will likely not be onshored. Depending on timing, this may include an obligation for FCs to report transactions on behalf of NFCs.

Existing reporting arrangements may be made more complex as UK entities will need to report trade transactions to a UK trade repository. Another issue which we may find after Brexit is the classification of NFCs. Without an equivalence decision with respect to the UK markets, products traded may become OTC derivatives and change clearing threshold limits for NFCs.

The impact on Central Counterparties or CCPs will also be affected by Brexit as they will need to be recognised by ESMA in order to provide services to EU persons. There has already been a temporary clearance until 30^th March 2020 to recognise UK CCPs and this period may also be extended.

SFTR

The Securities Financing Transactions Regulation or SFTR entered into force on 11^th April 2019 with reporting requirements phased in on the same month in 2020. These technical standards cover;

• authorisation of trade repositories (TRs) and performance of their functions,
• access by regulatory bodies to the data held in TRs,
• content, format and frequency of reports by market participants to TRs with respect to securities financing transactions or SFTs.

Securities Financing Transactions (SFTs), are any transactions where securities are used to borrow cash, or vice versa. This includes securities lending activities, sell/buy back, repurchase agreements etc.

These reporting requirements are already in force and are expected to become UK law after we leave the European Union. Persons established in the UK will become third-country entities under SFTR while persons established in the EU would become third-country entities under the UK version of the law. If a UK entity continues to have a branch in the EU, then they will be required to uphold the SFTR regulation in the EU and vice versa for an EU entity continuing to operate in the UK.

CSDR

The Central Securities Depositories Regulation (CSDR) entered into force on 17 September 2014 but during 2020, participants will be subject to obligations to prevent settlement fails as well as addressing settlement claims already made. These changes were expected to come in on 13^th September 2020 but will probably be delayed to November 2020.

From this date, the mandatory buy-in regime will require all parties in settlement chains to reflect the buy-in process in contractual agreements with counterparties. 2020 will be the year that ESMA assesses the data quality and addresses the reporting failures.

CSDR has been a key issue with regards to Brexit and as such, the ESMA and Bank of England have a memorandum on the mutual recognition of CCPs and central securities depositories or CSDs. ESMA also issued a temporary recognition decision in anticipation of a no-deal Brexit which expires at the end of March 2021.

IFD/IFR

The investment firm reforms have been hotly debated but finalised as the Investment Firms Directive and Regulation in 2019 with the aim of coming into force on 26^th June 2021 giving an additional transition period for certain firms until 2026.

During 2020, firms will need to assess how they are classified under the new regime. The new rules will heavily influence how an investment firm is classified by the size of the firm and volume of activities. The largest firms that deal on own account and have permission to place a firm on commitment basis will be classified as credit institutions and will need to be licensed as such.

Small firms with similar permissions will also be subject to prudential and remuneration requirements similar to one’s that apply to banks. Firms will need to assess the impact on their licenses, capital and remuneration requirements as this regulation will likely result in more onerous capital and remuneration requirements. For example, Class 2 firms will be subject to variable capital requirements that they had not previously been subjected to so they will need to enhance their monitoring processes accordingly.

AML/CFT

Anti-Money Laundering and Counter Financing Terrorism regulation will continue to develop in the EU, with UK implications. For example, the UK transposition of the MDL5 will occur on 10^th January 2020 after a short consultation.

Brexit poses challenges for UK and EU authorities, already expressed in October 2019 by the European Supervisory Authorities (ESA), because there may be inadequate national supervision of firms as they relocate from the UK.

The UK Government has already set out an Economic Crime Plan which describes seven strategic priorities for 2020. These include;

• a requirement to report Ultimate Beneficial Owner (UBO) information discrepancies,
• new AML/CFT and proliferation National Risk Assessments,
• expansion of public-private information sharing through Joint Money Laundering Intelligence Task Force (JMLIT),
• considering tactical targeting orders.

The Government’s new public-private Economic Crime Strategic Board (ECSB) will have a focus on improving law enforcement and AML/CFT supervision capabilities. This will include work like improving Companies House information quality, cyber threats etc.

2020 will also be the start of the cryptoassets regime in MLD5 where new cryptoasset businesses will be required to register by 10^th January 2021.