Brexit: PM Theresa May’s 17 January 2017 Speech – 5 Key Points

Exit Single Market: the UK will seek leave the EU Single Market in a “clean” Brexit because being a member of the market means accepting the Four Freedoms including the free movement of people in the EU, something that is seen as a red line following the UK Brexit vote.

Free Trade Deal: whether realistic or not, the UK will seek to negotiate a free trade deal with the EU in the 2 year period of negotiating to leave the EU after triggering Article 50 of the Lisbon Treaty (expected in March 2017 with Brexit in 2019). Transitional measures could be in place for some industries e.g. Financial Services until a trade deal is in place.

Customs Union: since being a member of the EU Customs Union would prevent the UK from entering into other trade deals, the UK will also seek to leave this (unlike e.g. Turkey which is party to the Customs Union although outside the EU).

Parliamentary Vote: whatever negotiated position between the EU and UK is reached will be put to a vote in both Houses of Parliament in Westminster. The question is would a rejection of a Brexit deal by Parliament be seen as frustrating the will of the people?

“No deal better than bad deal”: if the UK gets no deal agreed with the EU, the UK will be free to change its economic model to become a low tax haven outside the EU and presumably suck away business and tax revenue from the EU. This would be a nuclear option.

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Brexit: we don’t know what we don’t know

A lot has been written and speculated about how Brexit will play out so I thought I’d write something about what we don’t know.  I’ve avoided using the adjectives hard or soft and the focus of this piece is primarily on the financial services market.

1 – We don’t know PM Theresa May’s plans.

This is not necessarily a bad thing. It would be unusual for a deal negotiating team at a bank, corporation or law firm to give and take briefings about how they are negotiating a particular deal with all their colleagues.

2 – We don’t know who is going to scrutinise the Brexit negotiations.

To me, planning for and negotiating to exit the EU is akin to planning for a battle and as John Travolta’s character in Broken Arrow so eloquently put it, “[Battle] is a highly fluid situation. You plan on your contingencies, and I have. You keep your initiative, and I will. One thing you don’t do is share command.” Decisive planning and leadership is probably more important than a negotiation by general consensus.  Theresa May’s term in office will be characterised by one thing – how she leads the UK through Brexit.

3 – We don’t know if the City of London will keep passporting rights after Brexit.

People argue that much depends on the UK keeping the passporting rights currently available under EU single market legislation such as the Markets in Financial Instruments Directive (MiFID), Alternative Investment Fund Managers Directive (AIFMD) or Insurance Mediation Directive (IMD), which enable cross-border financial services regulated in the UK to be provided into EU member states. This is probably true.

However, the reverse proposition also needs to be considered: many EU (or EEA) firms also passport in to access the UK market – a developed global financial services market with a deep pool of capital and the second highest GDP in Europe after Germany.  Wouldn’t these firms want the EU to keep these rights?  According to figures from the Financial Conduct Authority (FCA), there are over 8,000 firms passporting into the UK (especially investment firms and insurance companies).

4 – We don’t know if London will lose its position as the leading global forex trading hub.

London’s share of global forex trading fell from 41% to 37% according to the last triennial survey conducted by the Bank for International Settlements (BIS) in 2016.  This market share may be under further threat post-Brexit with some currency trading (e.g. the Euro) moving out of London.  However, London’s global share far outweighs second-placed New York (19%) and the combined share of Frankfurt and Paris (4.5%).

5 – We don’t know what the future holds for the UK outside the EU.

If the UK leaves the EU and there isn’t any negotiated access to the EU single market then, assuming there is no dramatic change in current laws or regulations post-Brexit, the UK could be viewed as a country that has an equivalent financial services regime to the EU.  There is a list of countries (e.g. Australia, the USA and Singapore) that the EU deems equivalent in relation to their regulation of banks, investment firms and exchanges.  The UK could be part of such a grouping in the future and thereby gain market access to the EU.

6 – We don’t know how upcoming elections in France and Germany will affect the EU landscape.

Brexit is above all a political move.  Elections in 2017 in France (April – May) and Germany (September) will have some bearing on who is at the table negotiating Brexit or what cards they have in their hands.

7 – We don’t know how far the Pound will fall.

In the wake of the Brexit vote, we saw the Pound dramatically and then steadily fall from close to $1.50 to $1.22 (midday 12 January 2017).  It doesn’t seem that long ago when the Pound was $2 (September 2007).  How much further will it fall?  Prices that depend on imports will go up but, at the same time, UK exports will become more competitive globally and this may help create jobs.  Has the UK managed to devalue its currency by the back door?

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Persons with Significant Control (PSC) Register under proposal for UK-established companies

The Small Business, Enterprise and Employment Bill (sponsored by Vince Cable – the Business Secretary), is currently going through parliamentary processes in Westminster.  When it is passed, this Bill will become an Act and will seek to make various changes to corporate and other legislation applicable to companies established in the UK.book_hardcover_3

One of these changes will be to introduce the requirement for companies to maintain, along with other statutory registers, a Register of Persons with Significant Control (PSC) over the company and to make this public subject to some exclusions.  Duties will be Imposed on companies to gather information and on others to supply the information to enable the PSC register to be kept.  These changes will be made by introducing a new Part 21A to the (UK) Companies Act 2006Current proposals are for this to apply from January 2016 with filings from April 2016.

Who is a PSC?  For these purposes, a person with significant control over a company is defined as an individual that either alone or with other share or right holders meets one or more of these conditions:

  • holds, directly or indirectly, more than 25% of the shares (or right to share in the capital or profits where no share capital);
  • holds, directly or indirectly, more than 25% of the voting rights;
  • is entitled, directly or indirectly, to appoint or exercise a right to appoint or remove a majority of the board of directors;
  • has the right to exercise, or actually exercises, “significant influence or control” over the company. An expert working group is being formed to draft statutory guidance on this;
  • trustees of a trust or the members of a firm that is not a legal person meet one or more of the other specified conditions in their capacity as such or would do if they were individuals.

Exclusions.  The new Part 21A will apply to all UK-established companies, other than listed public companies (issuers) to which Chapter 5 of the Disclosure and Transparency Rules apply.  The UK government is expected to allow the suppression of information on the PSC register from public disclosure in certain limited circumstances e.g. protection to individuals at serious risk of violence or intimidation arising from the company’s activities.

Regulatory Enforcement Update

(1) The European Commission said in a press release on 4 February 2015 that it fined UK brokerLawEnforcement ICAP €14.9 million for having breached EU anti-trust rules by facilitating several cartels in the sector of Yen (JPY) interest rate derivatives (YIRD).  The anti-competitive conduct concerned discussions between traders of various participating banks on certain JPY LIBOR submissions.

(2) Alex Hope (7 years’ imprisonment) and co-defendant Raj Von Badlo (2 years’ imprisonment) were sentenced following their conviction for defrauding investors and operating an unauthorised collective investment scheme, which was closed by the FCA in April 2012.  Over 100 investors gave Hope over £5.5 million to purportedly trade in forex markets although most of it was not traded and instead diverted to fund his lifestyle.  Von Badlo promoted Hope’s scheme to many investors.

(3) Meanwhile, the City of London Police announced on 5 February 2015 that they had concluded there is not sufficient evidence to progress a criminal investigation of payday lender Wonga.  The main allegations against Wonga were that it had deceived its customers by sending letters falsely purporting to be from lawyers with the aim of recovering their outstanding debts.

New Market Abuse Regime: ESMA advises European Commission on implementation

On 3 February 2015, the European Securities and Markets Authority (ESMA) published its technical advice to the European Commission on possible delegated acts under the Market Abuse Regulation (Regulation 596/2014) (MAR) in a Final Report.

The draft technical advice covers recommendations in the following areas:

  • examples of practices that may constitute market manipulation as well as proposing additional indicators of market manipulation.
  • minimum thresholds for the purpose of the exemption for certain participants in the emission allowance market from the requirement to publicly disclose inside information.
  • how to determine to which regulator delays in disclosure of inside information need to be notified.
  • clarification of the enhanced disclosure of managers’ transactions.
  • clarification of the transactions that can be allowed by the issuer during a closed period when normally trading by managers is prohibited.
  • procedures and arrangements to ensure sound whistleblowing infrastructures.

In some cases, ESMA has modified its technical advice in the light of comments received in its consultation in July 2014 on MAR.

Next steps

ESMA will send this technical advice to the European Commission for its consideration in drafting its implementing standards regarding MAR.  ESMA’s regulatory technical standards (RTS) on MAR are intended to be delivered in July 2015.  Under European law, these delegated acts should be adopted by the European Commission so that they enter into force 24 months after the entry into force of MAR.  MAR entered into force on 2 July 2014 so the delegated acts would need to be in force by July 2016.