A leading Brexit backer says the U.K.’s path to deliverance from the constraints of Brussels begins with imposing sweeping new European Union rules on the country’s financial markets.
The U.K. should ensure that the EU market-rule overhaul known as MiFID II enters into force as intended in January 2018 to avoid complicating the government’s talks on secession from the bloc, said Jacob Rees-Mogg, a Conservative lawmaker in Parliament’s Treasury Committee and an outspoken Brexit supporter.
Rees-Mogg said now isn’t the time for the Treasury and regulators to alter the rules as they put them in place in the U.K. over the next year. That time will come after Britain quits the bloc, he said.
“We’ve got a really big diplomatic job with the other European countries to persuade them that we’re perfectly decent people to deal with, and if we get ahead of ourselves and become very aggressive in the changes we make before we’re by treaty free of the shackles of the European Union, then I think that makes that diplomatic job harder to do,” Rees-Mogg said in an interview.
There’s “no way legally” not to convert the EU directive into U.K. law while the country is a member of the bloc, he said, but once Britain has left, “we can in all senses legally change any regulations that we want.”
The U.K.’s approach to implementing MiFID II, which governs trading in stocks, bonds and derivatives, underscores the tension Prime Minister Theresa May faces between heeding the wishes of British voters and giving the City of London the best shot at maintaining access to the single market.
Chancellor of the Exchequer Philip Hammond is ready to accept that Britain may have to quit the single market — and U.K. financial firms’ unfettered access to EU clients — to deliver the restrictions on immigration demanded by voters in the June 23 Brexit referendum, according to two officials familiar with his thinking. Given that, the prospect of the U.K. making major changes to MiFID II may give financial firms cause for concern.
Outside the single market, U.K.-authorized firms would probably lose their right to sell services throughout the trading bloc. Instead, they’d have to rely on third-country arrangements in MiFID II and other financial-services acts for access that would be contingent on the European Commission’s recognition of U.K. rules as equivalent to those in the EU.
That will probably allow global banks based in the City of London to retain limited access to the EU’s single market after Brexit even if they lose full passporting rights, according to Moody’s Investors Service. While that would push up costs, the increase would be “manageable,” Moody’s said.
Barclays Plc has said that the third-country arrangements in MiFID II “could cover much of the relevant parts of our EU operations.”
But if the U.K. rules were altered after Brexit, equivalence could be threatened.
Rees-Mogg said the U.K. would have some latitude to make changes. Equivalence doesn’t mean you must have “exactly the same rules; you just have to have proper checks in place,” he said. “You can’t expect every country in the world to adopt the EU rule book, but you want to have reasonably open financial markets.”
His interpretation wasn’t shared by Markus Ferber, the lead lawmaker on MiFID II in the European Parliament.
“Deviations from the European reference framework simply can’t be too big,” Ferber said. “This means the U.K. will eventually implement European law so that it doesn’t endanger the equivalence status. Naturally this can hardly be brought in line with Brexiteers’ claims that Brexit means newly gained sovereignty.”
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The Treasury, the Bank of England and the Financial Conduct Authority have asked for feedback on transposing MiFID II, including its restrictions on algorithmic trading, limits on speculation in commodities and reporting of data. The EU directive must be converted into national law by July. The Treasury plans to release a policy statement before presenting legislation to Parliament, while the regulators are working on changes to their rule books.
U.S. and European firms have criticized a range of provisions in MiFID II, saying that they could increase the costs of trading and diminish liquidity in markets.
“We’re certainly hoping that the U.K. will take a step back and look at MiFID II and some of the requirements that went well beyond the G-20 agreements, and frankly, look at regulations for markets, the futures markets which have not historically had any issues at all,” Scott Hill, chief financial officer of Atlanta-based Intercontinental Exchange Inc., said this month.
Yet many in the industry say their top priority is to preserve access to the EU single market for their trading operations based in London. And that may depend on how faithfully the U.K. adheres to MiFID II.
Rees-Mogg, a co-founder of Somerset Capital Management in 2007, didn’t identify parts of MiFID II that need changing. The guiding principle, he said, is to ensure that “somebody in my position in 2007 setting up a new investment management business can still do so in a reasonably efficient way without very high dead-weight costs.”
For banks seeking clarity on the U.K. government’s position and the regulatory framework that will apply after Brexit, the prospect of chopping and changing a law as crucial as MiFID II may contribute to anxiety.
Rees-Mogg said regulators should “work out which bits of MiFID II they would introduce anyway and highlight them in the process,” making clear that these are what “we argued for in Europe and we are committed to.” They should also identify provisions that are “superfluous and that we will get rid of as soon as we are free to do so,” he said. “That I think would make it clear to people where they ought to concentrate their resources.”