What Does Brexit Mean for Brokers & MiFID?

While many investors have been preoccupied with managing their exposure and seeking out the best trading opportunities in the volatile markets that have followed the UK Referendum, it’s easy to forget that Brexit will also have far-reaching and long term consequences for the financial industry.

Britain’s decision to withdraw from the EU raises a huge number of questions about how institutions will do business in both the UK and the remaining EU member states, and this uncertainty includes the brokerage houses and exchanges that lie at the heart of the financial system.


Understanding the MiFID Legislation and ‘Passporting’

The piece of legislation at the center of this puzzle is known as MiFID. The ‘Markets in Financial Instruments Directive’ governs how financial institutions operate throughout Europe, providing harmonized regulation of financial services, and seeking to increase competition and consumer protection. One of the key concepts to focus on in light of Brexit is that of ‘passporting’.

Is your broker based in a different country to the one in which you live? Prior to the MiFID directive, in order to accept you as a client your broker would have had to meet the regulatory requirements of your own country. Likewise for any other country in which the broker wished to solicit clients. MiFID changed this. It sets out standardized expectations of regulators across individual EU member nations, and encouraged the sharing of information between these agencies. Providing a brokerage firm is compliant with the regulator in its home country, regulators in other countries can be assured that the broker is also compliant there.

The question now is what will happen to this ‘passporting’ privilege following Brexit . . .

The Post Brexit Brokerage Landscape

While it may seem obvious that non-UK brokers would simply register with the UK’s regulatory body, the FCA, and continue to attract clients in this country, the reality is that many firms will not be happy about the cost implications for doing so. Compliance is an expensive proposition. On a firm-by-firm basis, this will be a numbers game: does the additional income generated by UK customer accounts justify the expense of the further regulatory burden?

What we may now see is a similar situation to what we have seen play out in the US over the last half a decade. Legislation requiring foreign exchanged brokers to participate in an expensive program of compliance with the CTFC (who previously only oversaw futures and options markets) came hot on the heels of the financial crisis, and most firms simply balked. A few buyouts down the road, and forex traders domiciled in the US are left with just a scant handful of firms to choose between. UK traders may find themselves in a not dissimilar position as the country begins to extract itself from the European Union.

Is ‘Equivalence’ the Answer?

Whereas increased regulatory oversight in the US was arguably beneficial, preventing irresponsible and unscrupulous overseas firms accepting deposits from American citizens (even as it limited the number of brokers amongst which investors can choose), the situation is somewhat different in Britain.

It is unlikely that the UK’s FCA would impose requirements that are in any way significantly different to those of EU countries operating under MiFID. The UK could therefore respond by agreeing to continue accepting firms under the passporting arrangement post Brexit, but given the current political atmosphere it seems unlikely that such an arrangement could be reciprocal; UK brokers would lose their passport into Europe.

The Brussels-based FTI Consulting’s Financial Services Practice described this problem in terms of regulatory equivalence: “as the outcome of the UK’s exit, a majority of the members of the EU might not be eager to decide favorably on UK equivalence.”


A Twist in the Tale – MiFID II

Just to complicate matters further, a new directive looms; MiFID II is a further piece of legislation expected to come into effect in January 2018. It seems highly unlikely that the UK will have any substantial influence over its content, potentially further alienating the FCA from regulators on the continent and blurring the possibility of equivalence.

Any attempt by Britain to co-opt only selected parts of the new directive will certainly be disruptive of the vision of regulatory uniformity towards which legislators have been working.

The picture currently remains unclear, and like many other elements of the post Brexit financial landscape, it may be some time before it comes into focus. Even if EU domiciled brokers choose to cease operating in the UK, traders will still be left with a far wider range of firms to choose between than their US counterparts.