When Prime Minister Theresa May triggered Article 50 it marked the beginning of an uncertain couple of years for the UK’s financial services sector.
With more than £5 trillion in assets managed within the UK, hedge funds and investment firms are a huge part of the economy. But the asset management industry may now be at risk as around £1.2 trillion of those assets are managed on behalf of clients within the European Union (EU) and Brexit means that UK financial institutions may lose their “passporting” rights.
What is MiFID II?
The Markets in Financial Instruments Directive (MiFID) regulates the trading of assets within the EU. Firms that possess a “MiFID license”, also known as a single passport, are eligible to provide services to clients linked to assets anywhere in the European Economic Area (EEA). This means that financial instruments such as shares, bonds and derivatives can be regulated in Luxembourg, managed in London and sold in Paris seamlessly.
MiFID was originally brought into law in 2007, but following a decade of turbulent economic activity the EU elected to update the legislation and introduce further transparency to the trading of financial instruments. These subsequent amendments were given the catchy title “MiFID II” and approved by the European Parliament in April 2014.
“MiFID II is aimed at combating the weaknesses exposed by the financial crisis and protecting against market abuse,” explains Farida Rahman-Wright, Professional Standards Manager at AAT. “It extends transparency from shares to other equity-like instruments and to non-equities such as bonds. Increased transparency boosts investor protection, reinforces confidence and ensures that supervisors are granted adequate powers to fulfil their duties.”
Complying with the new requirements
The transparency and reporting requirements mandated by MiFID II are scheduled to come into effect on January 8, 2018. But with the amendments drastically increasing the compliance obligations of some of the UK’s most complex financial institutions, firms are already looking ahead and beginning to grapple with how the regulations affect their operations.
“When MiFID was introduced in 2007, there was a lot of uncertainty as to how it would change markets, and many of the changes that eventually did take place were unexpected,” says David Morrey, partner at Grant Thornton, a professional services network of independent accounting and consulting member firms. “There is the same uncertainty around MiFID II, but one thing is for sure – there will be a lot more data on financial markets.”
The challenge for firms, and the accountants who serve them, is to determine how that data can be analysed and put to use. Figuring this out will create new opportunities to turn trade and transaction reporting into actionable information, which will ultimately have real value for clients in the financial services industry. But this opportunity also comes with increased responsibilities for accountants, particularly those working with hedge funds and other asset traders.
“The amendments to MiFID spell major changes for the financial markets, and greatly increase the pressure on fund accountants to collect and report data on transactions to regulators,” says Rahman-Wright. “Accountants should conduct initial impact assessments on revenue structure and on costs — for example, as a result of increased controls and reporting requirements, and agree implementation projects, timelines and budgets.”
The UK’s impending departure from the EU has created much uncertainty for asset managers and investment firms in London. But the UK’s withdrawal from the union doesn’t mean MiFID II will be abandoned. Following the referendum vote in June 2016, the Financial Conduct Authority released a press statement reiterating the government’s commitment to implementing MiFID II.
“The UK is still a full member of the European Union and all the rights and obligations of EU membership remain in force,” says Rahman-Wright. “Until the conclusion of exit negotiations, the UK government will continue to negotiate, implement, and apply EU legislation as scheduled.”
Despite this commitment, as many as 70 percent of asset managers fear they will not retain full passporting rights once Brexit is finalised. Instead, it’s hoped that by implementing MiFID II the UK will be able to be recognised as an “equivalent” regime under EU legislation. This would mean that some management of EU assets could continue, albeit with more restrictions than are currently in place.
“Following the UK’s exit from the EU, UK firms are likely to require new licenses to trade financial instruments with the continent,” says Rahman-Wright. “If the UK is recognised as an equivalent regime, firms that are compliant with MiFID II will be able to take advantage of third country access rules and continue trading with the EU.”
MiFID II aims to bring unprecedented levels of transparency to the financial services sector. Accountants that work closely with fund managers and asset traders must be aware of the upcoming changes to EU legislation. As uncertainty clouds the future of the financial services industry, the implementation of MiFID II may bring about some much needed stability.
Jesse Onslow Norton is a writer, editor and communications consultant at Flibl. A former coder, his editorial work focuses on fintech, digital transformation, policy and regulation. His clients include corporations, governments, startups and SMEs from across the world. Follow him on Twitter @JesseOnslow.