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Global Trustee and Fiduciary Services News and Views
| Issue 48 | 2017
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• There is the prospect of third-country
passporting regimes coming in under MiFID
II and MiFIR with effect from January 2018:
and there are two variants to review. But, even
if these are made available – and, of course,
as at the date of exit, the UK will be fully
equivalent and so an equivalence decision
would be likely to be forthcoming — these
would likely be an inadequate substitute for
a full MiFID passport.
UK firms will likely be reluctant to agree to
utilise any such third-country regime on the
existing understanding of equivalence and the
process for achieving it and maintaining it.
There are three main obstacles here.
• Firstly, the bottom line is that, unless
and until equivalence is agreed to be a
broader concept, the notion of using these
equivalence regimes does not work well.
Currently there is a notion of equivalence by
way of a line by line equivalence comparison
analysis. Instead of this, the analysis should
probably recognise the equivalence of
outcomes (rather than the equivalence
of input). Indeed, developing the notion
of equivalence should perhaps be viewed
as a necessary part of a wider debate —
strengthening the regulation of the financial
sector on a global basis.
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The likelihood
is that firms will be reluctant to agree to
utilise any third-country regime on the
basis of full equivalence.
• Secondly, there is a moving target because
the regulation with which one is trying to
be equivalent will change over time. Post-
Brexit, subject to the terms of any post-
Brexit deal, the UK would have no control
over how it might change. This might be
fixed by facilitating the involvement of
the UK in, or at least the attendance of
UK representatives at, ESMA’s and other
European regulatory meetings and generally
by ensuring full cooperation between
regulators, but this would need to be a
specific part of the Brexit deal.
• Thirdly, even if equivalence were obtained
and one took a view on one’s ability to
maintain equivalence, the equivalence
decision could be switched off at any time.
And so it would be unlikely to be viewed as a
reliable business model. Again this might be
fixed by specific assurances contained within
a specific post-Brexit deal.
For any equivalence, or preferably bespoke
mutual recognition, system to work, there would
need to be specific negotiation of the terms
for it, and a specific bespoke deal that moved
on quite markedly from the potential third-
country equivalence regimes that are currently
documented and so within the EU’s sights.
Absent positive news of any innovative mutual
recognition regime being on the table or agreed,
the current focus is on formulating fall-back plans
focusing on other areas, as explained below.
Delegation
The first, and key, question is: how much can
still be carried on in London?
For most, the focus is on how to achieve
effective continued delegation of investment
management and other functions from EU firms
and EU-based fund vehicles to the UK-based
investment management firm, assuming that
the UK will, post-Brexit, be a third country.
It is probably fair to assume that the position for
the UK should not be less helpful than the position
that third countries, such as the US, currently
enjoy. However, it is necessary to work through the
details of the precise delegation powers to third
countries and also the way in which EU regulation
will be applied in the countries from which the
delegations are to be made.
There are differing conditions for delegation
to a third country in respect of delegation of
portfolio management:
Each of these nuances needs to be noted
and considered carefully. For each product
or service, one needs to look at the relevant
source provisions.
As part of this exercise, one needs to look at
current interpretations of each of these provisions,
how such interpretations may develop over time
and how they may differ between EU Member
States, most notably Luxembourg and Dublin.
The interpretations may also develop over
the course of the Brexit negotiations.
For UCITS.
For an AIF under the AIFMD.
And by a MiFID firm providing
MiFID investment services.