Following the UK referendum result, capital market participants in the UK have asked whether they will still be affected by the EU’s Capital Markets Union (CMU) package of reforms.
The short answer is, yes (at least in the short to medium term).
Between now and 2019, a wide range of measures are being proposed under the CMU umbrella in an effort to promote investment and growth by unifying capital markets across Europe. Examples of CMU initiatives that are likely to be in place before Brexit happens include the proposed Prospectus Regulation and Securitisation Regulation, which represent tectonic shifts in the regulation of debt capital market and securitisation transactions.
UK capital market participants need to prepare for their implementation. In the period leading to the actual departure by the UK, EU rules will continue to apply in the UK. Any new rules that come into force between now and the UK’s departure (including those implemented under CMU reforms) will also apply.
On the day the referendum result was announced, the Financial Conduct Authority issued a press statement reminding firms that they must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect.
The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK has with the EU following its departure. What we may see in the meantime, however, is a gradual shift in how the CMU project evolves. The resignation of Jonathan Hill as Commissioner for Financial Stability, Financial Services and Capital Markets Union means that the UK has lost a strong voice in the shaping of the CMU project. His portfolio has been assumed by Latvia's Commissioner, Valdis Dombrovskis.
Prior to Mr Hill’s departure, the UK government expressed concerns that CMU would involve the transfer of direct supervision of UK market infrastructures or firms to the European supervisory authorities and/or the European Central Bank. Diminished influence from the UK may tip the balance towards greater centralisation, and this may make the UK’s negotiations either to go it alone or comply fully with the EU’s CMU framework ever starker.
There may be advantages either way. At this stage, Mr Dombrovskis has not indicated any intention to change direction with respect to the liberalisation of European capital markets, and there may be opportunities in a full EEA-style participation in the European capital market regulatory regime. Examples include efforts to reduce or eliminate obstacles to cross-border investment, and the introduction of pan-European financial products intended to increase choice for investors and achieve greater economies of scale.
On the other hand, there are concerns that the CMU reforms will stymie capital market activity in some areas through onerous increases in the regulatory burden. For example, early indications are that changes to the regulatory capital regime affecting insurers and reinsurers may discourage investment in securitisation products. In addition, implementing such a full reform agenda means years of regulatory uncertainty. While we do not expect to see a wholesale rejection by the UK of European capital markets regulation, there may be advantages to having a more tailored response to CMU regulations.
Please see our online Brexit and Capital Markets Union resources for more in-depth analysis. Our CMU technical resource is a comprehensive guide to all CMU initiatives, and is updated in real time to reflect changing legal and practical measures as the CMU project develops.