Over one-third of delegates that were asked at this year’s Association for Financial Markets in Europe (AFME) Legal and Compliance, conference thought it would be more than likely that the UK could leave the EU without a deal. Of those that were asked, 31 percent thought there would be 41 to 60 percent chance that the British Prime Minister and the rest of the Conservative Government would not gain a deal from the EU, with the Chequers deal appearing to have been cast aside in recent weeks. The question was put to the audience in a plenary panel discussion on Brexit. The audience was also asked whether, in five years’ time, they thought they would do more business within the EU or outside it after the Brexit implementation. Some 42 percent predicted that their business would conduct more business outside of the EU.
Over the course of the discussion, some panellists were more sceptic than others, but most were unanimous that only so much could be foreseen until March 2019. One panellist was concerned that where asset management is concerned, it is important to be able to run under a global model.
He said: “Managers want the best access to the best centre of excellence” and he warned that under Brexit, “UK firms may not have this same model.”
Another panellist suggested that no matter how well your business prepares for Brexit between now and March 2019, there are some points of business that firms simply cannot start doing on their own.
As such, another panellist mirrored that the industry as a whole needs to “monitor what is going to happen in particular within equities, derivatives and the stability of counterparties they use”.
He added: “We watch this closely but we don’t know what is going to happen.”
There was a general agreement across the panel that, as one panellist said: “a lot [of legislation for Brexit] will be shoved into a transitional period well in to 2020”, while another warned there will be a “blinder Brexit than people would like”. However, there were some positives to note. One panellist said the “UK has shown hands-on how it plans to deal with no deal situations”.
He also said that there has been “an output of many thousands of hours [of manpower] surrounding union withdrawal and I see regulatory implementation shaping. The EU treating us [the UK] as a third country is pretty clear, and there have been significant accommodations to negotiate with that. I think the broad direction is clear”, he added. From a buy-side perspective, another said that he sees enhanced equivalence moving forward.
He said: “I am encouraged we [the UK and EU] are heading in the right direction ending up with enhanced equivalence. Hopefully, there will be more divergence where and when you serve your clients.”
He concluded: “There has been a huge movement in two years [since the referendum]. There has been an increase in cooperation agreements and memorandum of understandings from regulators. So far it is very encouraging.”
Prior to that, was a discussion by a representative of the Autorité des marchés financiers (AMF), who discussed why some legal and regulatory elements of the second Markets in Financial Instruments Directive (MiFID II) may have to be changed after the UK leaves the European Union in March 2019. In his keynote address, ‘MiFID II implementation and experiences from a supervisory authority perspective’, he said “the time is right to get it right” in terms of changing MiFID II legislation to comply with Brexit.
The speaker explained: “Data is at the very core of MiFID II implementation, in that large parts of participants have to work with it. Financial instruments are run by the European Securities and Markets Authority (ESMA) and there are approximately 1.3 million legal entity identifiers (LEIs) issued worldwide. ESMA and national competent authorities (NCAs) are constantly monitoring the quality of data we use very closely but there are still difficulties. It is obvious there is room for improvement and a common interest to improvements for NCAs and our businesses.”
He continued: “Legislative fixtures will need to be implemented for inefficiencies or redrafts, some of which may stem from Brexit’s consequences.”
This is of extreme importance he said as of the five million transaction reports carried out across Europe, 72 percent are from the UK to the EU, compared to 11 percent sent from the EU to the UK. He said that concerning Brexit there “needs to be a MoU signed by all EU27 and the UK’s Financial Conduct Authority in order to cover all services legislation in delegation when putting Brexit contingency plans in place”.
In the following question and answer panel, ‘Experiences of implementing MiFID II and how this may influence Brexit’, the AMF representative was asked if MiFID II had met its objective. Though he said there was no need to “rapidly change” the MiFID legislation, he added “there are quick fixes where elements could be adapted. That would be necessary even if the UK were staying in the EU. But there are elements that need to be changed that derive from the fact that the UK is leaving.”
The keynote speaker was asked whether ESMA should become a ‘super’ regulator, or if it would be more beneficial for the industry to have a ‘super NCA’.
He replied: “Some NCAs are very systemic, others are less systemic, but that is not the case for other major market infrastructures. [Industry firms] need to be in local relationships with [their] local ecosystem. ESMA should be given the tools to achieve more convergence and centralised supervision, but there’s a long way to go.”
As the discussion came to an end, he was asked: if there was another crash, similar to the Lehman Crisis in 2008, would the market recover? In answer, he said: “The industry is ready to react ready and swiftly, but collaboration is key, we don’t know where [another possible crash] will come from. Stress tests are useful but never cover all responsibilities.”
In the afternoon, discussions moved on to technology and whether artificial intelligence (AI), in particular, is harder to police than humans. The discussion, split the audience right down the middle, with 50 percent saying “yes” and “no”.
The question was asked in a panel named ‘Overseeing AI and algo-trading’. The crux of the conversation leaned toward taking machine learning away from the pilot space and more into everyday utilisation while making sure the next generation knows, and has access to, the tools to police it. One panellist said: “The debate is about transparency, black box deception, all the way to deployment, to ensure good governance around AI.”
The panellist discussed that this level of governance is, unfortunately, really only known by a “very niche number of individuals” who actually know what is going on.
They added: “A lot of people [in financial services] feel threatened by AI, but it is important to embrace it and look at business models—really carve out where humans are needed. And then question at what point does it make sense [in your business model] to have a human there? And where does it make sense to use machines?”
The moderator also asked the audience if they thought regulators had moved quickly enough to address the need to supervise AI. The majority, 73 percent, said “no”, while 27 percent said “yes”. In slight defence of regulators, one panellist said: “[Recently] there has been a lot more expertise in AI with regulators but it’s moving so fast.” She questioned: “How does anyone keep up?”
Another panellist stated legal and regulatory frameworks lag behind in other industries, not just asset management—he used Uber and the music industry as examples where legal and regulatory frameworks have needed tweaking in recent years. He added this is a global issue because it is the “nature of the technology we’re dealing with”.
Another panellist concluded: “Technology is moving so fast, having a good use of technology data can give you an effective edge.”
In a speech after this discussion, a representative from the International Organization of Securities Commissions also reiterated the concerns of AI and the issues around machine learning changing at such a fast speed. He questioned: should we be putting in roadblocks or intervention, concerning AI? And in what places within the financial industry?
In a concluding point, he said to the audience: “I’ve probably left you today with more questions than answers, but it’s something we need to go away and think about.”
