24 November 2016

Blog: Zweites Finanzmarktnovellierungsgesetz - Soft Brexit Looks eminently achievable for UK Financial Services Companies

by Kevin Lapwood | 24 November 2016

For those of us who were wondering what will happen to UK financial services companies wishing to continue to do business in Europe after Brexit, the latest consultation on the implementation of MIFID2 in Germany provides some clues. The German Ministry of Finance has just concluded a consultation on a draft bill for the Second Financial Markets Reform Act that aims to transpose, amongst others, the European Markets Infrastructure in Financial Instruments Directive, known as “MiFID2” into German law. Given that many of the key recommendations for MIFID2 stem directly from the 2001 UK Myners report, it is perhaps useful to see how our former colleagues will implement them and what impact that will have on UK financial services companies. The answer, on the face of it, is that most UK financial services firms will be able to continue to trade in the European Union as normal, because, if we implement the MIFID2 into UK law, they will already be effectively pre-authorised. However, experience has shown that there are options open to European Union members that may delay the process.

Together with the recent transposition of, amongst others, the Market Abuse Regulation and the PRIIPs Regulation earlier this year, the Act marks the second pillar in reforming the existing regulation of the financial markets in Germany and harmonising it further with the rest of the European Union. The provisions transposing MiFID2 will come into effect by the 3rd January, 2018.

It will, on the one hand, facilitate access of third-country firms, as the UK will soon become, to the European Union without having to apply for authorisations or to rely on reverse solicitation, but will, on the other hand, bring about a much stricter regulation of the financial markets with new authorisation requirements for market participants and business conduct rules.

Germany aims to transpose MiFID2 into its national laws without further gold-plating. In order to ensure its smooth passage into law, the consultation period is limited to one month and it is expected, given the upcoming parliamentary elections in Germany, that there will be an orderly legislative process.

The new Act will apply to firms that are either domiciled in Germany (themselves or their subsidiaries) or maintain a branch (either authorised or passported) in Germany. By contrast, firms authorised in another member state of the European Union or the European Economic Area that provide regulated services only by way of cross border service into Germany will not be regulated under the Act, but will be bound to comply with these obligations as a matter of the law of their home member states where MiFID2 must be equally transposed.

For firms originating from third-countries, and this is soon likely to include the UK, MiFID2 and MiFIR provide for a harmonised regime for market access into the European Union. Broadly, this regime for market access allows third-country firms to access the markets and provide services in the European Union without having to obtain additional authorisations in any of the member states provided that the European Commission has determined their home jurisdiction as being equivalent to that of the European Union and that they have registered with the European Securities and Markets Association. Given that, by the time we leave the European Union, we are likely to have already fully implemented the requirements of MIFID2 into UK law, it would appear that we should already be pre-authorised.

However, in the course of the equivalence decisions that are currently underway for the passport for third-country Alternative Investment Fund Managers, which are newly included in EU financial market regulations, it has become obvious that these decisions are likely to take a couple of years of preparation before being adopted for some jurisdictions. Although this is unlikely to affect the UK, it could provide the European Union countries with a reason to delay. This may be an important factor to consider for firms domiciled in the United Kingdom in the case of Brexit. In the meantime, the national regimes of each member state continue to apply to third-country firms.

For Germany, and most of the rest of the European Union, there are currently three options available for third-country firms that have clients domiciled or resident in Germany:

either to establish a subsidiary or a branch each of which would require an authorisation in Germany,

to rely on reverse solicitation.

to apply for an exemption with BaFin,