UK Wholesale Market Regulation Post-Brexit

What is the impact of Brexit on UK financial services firms?

Loss of passporting rights 
One of the key impacts of Brexit for UK financial services was the loss of passporting rights. Any financial services firm that is licensed to operate in one EU member state is permitted to operate in other member states. Since Brexit, the UK has lost this right and as a result, many UK firms have transferred client relationships to affiliates or subsidiaries in the EU. 

Divergence 
The UK now doesn’t have to keep EU laws. At the end of the transition period, the UK general retained EU law as it was at the time, a process known as onshoring. The government made amendments to ensure the laws were compatible with the UK, however they didn’t make any policy changes. This has resulted in two similar, but distinct regulatory regimes, meaning firms should be aware of the differences now and keep tabs on future regulatory divergence. 

Other consequences 
From the perspective of the EU, the UK now operates as a so-called ‘third country’. Third county firms have restricted access to EU markets, including restrictions to some market infrastructure. 

The share trading obligation, known as the STO, relates to shares which are admitted to trading on an EEA trading venue. EU firms can only trade shares on a trading venue in the EEA, or on a third-country trading venue which the EU has deemed equivalent. The UK is yet to receive an equivalence decision for the STO limiting the ability for EU firms to trade on UK markets. 

What is the UK’s plan for developing future regulatory policies? 

Given that the UK retained most EU laws following Brexit, firms’ regulatory obligations are spread across various pieces of primary and secondary legislation, regulatory rulebooks, technical standards and guidance. A lot of EU financial regulation ended up in law as the EU regulates via legislation. 

In response, in 2020 and 2021, the UK Government worked through two consultations on what it calls the Future Regulatory Framework.

The consultation papers draw a blueprint for returning to a ‘Financial Services and Markets Act (FSMA) model’ of regulation which would see responsibility for setting new regulatory obligations moved from legislators to regulators, with the idea being that the regulators’ rulebooks should become the single source of firms’ regulatory requirements. 

The UK government is already looking at reforming wholesale markets regulation, having published a consultation paper proposing wide-ranging reforms to the UK’s MiFID regime.