Simon Treacy, senior associate at Linklaters, highlights the challenge of navigating EU and UK financial regulation and discusses how technology can help chart a course to compliance
In financial services, it is important to know the rules of the road. In Europe, these rules proliferated after the 2008 Financial Crisis and were then duplicated when the UK left the EU. Brexit resulted in changes to the law but also to firms’ operations.
Many financial services firms now operate both in the EU and the UK, often with business and support functions spread across multiple locations.
As the two rulebooks continue to evolve, the regulatory framework that firms must manage becomes more complex. For legal, compliance and risk teams, keeping on top of divergence is a high priority.
Three main problems arise. Firstly, how to source the current version of the EU and UK rulebooks and visualise the difference between them.
Secondly, how to anticipate future regulatory change and understand its implications. Finally, how to apply the rules consistently across multiple businesses and multi- jurisdictional operations.
Linklaters Law Compare offers a solution to all three. The tool:
- provides a comprehensive view of both the EU and UK MiFID rulebooks — easily navigable via rule maps
- allows the tracking of divergence today, from the past and into the future
- enables the sharing of commentary on specific provisions with teams with insights available from Linklaters lawyers
Navigating the law
A key issue stems from how the UK inherited EU law at the end of the Brexit transition period. Swathes of legislation, which had previously applied automatically when the UK was a Member State, needed to be retained on the UK’s statute books.
Financial firms doing business in the UK now need to manage a patchwork of rules spread across multiple sources. These include primary and secondary UK legislation, retained EU law, some technical standards in legislation and other technical standards in the regulators’ rulebooks. It also involves regulator-made rules set by EU authorities that have been retained by the UK regulators, plus Financial Conduct Authority (FCA) and Prudential Regulation Authority directions, webpages and other materials.
The picture is complicated further by the changes that have been made to the law since Brexit.
First, the UK tweaked financial services legislation as part of the ‘onshoring’ of EU law so that it would continue to work in a UK-only context. Now, the UK has started making more substantive policy changes to better tailor the rules to the UK market.
In principle, accessing the latest version of the law should not be difficult. In practice, it is hard to get your hands on several important pieces of UK financial regulation.
Case study
Take the UK’s version of MiFIR — this is a vital piece of the regulatory framework for financial markets, but no up-to-date version of UK MiFIR is available online. The National Archives only provides a snapshot of the law as it stood before Brexit took effect, nearly three years ago.
Since Brexit, the UK’s MiFIR has been amended by onshoring regulations, the Financial Services Act 2021 and secondary legislation to implement ‘quick fix’ policy measures. With every step, the UK has moved further away from the pre- Brexit status quo.
To ensure effective compliance with their obligations, firms need to have confidence that they are referring to the latest version of the law and understand the divergence from pre-Brexit standards that has already taken place.
Managing regulatory change
There is still more change to come. In the UK, the Financial Services and Markets Bill 2023 reshapes the future regulatory framework in both the short term and the long term. For example, in the short term, the Bill amends UK MiFIR to implement key outcomes from HM Treasury’s Wholesale Markets Review. These amendments include removing the share trading obligation and double volume cap, redefining what qualifies as a systematic internaliser, and allowing the FCA to introduce a simplified transparency regime for fixed income and derivatives.
Meanwhile, the FCA has recently finalised a first set of amendments to post-trade reporting which will start to apply in 2024, with more consultations to follow.
In the longer term, the Bill grants extensive freedom to the UK Government and regulators to reform UK regulation so that the direct obligations on firms exist in the regulators’ rulebooks rather than on the statute books.
The EU is not resting on its laurels either. For example, the EU’s MiFID Review is currently exploring several important changes, including pre- and post-trade transparency requirements.
Firms need to scan the horizon for future change, engage with upcoming changes in context and understand the impact on their business.
Mapping divergence
The aforementioned changes underline how divergence is
an inevitable consequence of Brexit. The regulatory framework for financial services will always evolve in response to
market developments.
Regulatory change is also being accelerated by political incentives. Whether this is driven by the principle of strategic autonomy or international competitiveness, both the EU and UK are seeking to leverage regulation to protect and grow their respective financial sectors.
This dynamic divergence between the EU and UK presents a headache for firms subject to both sets of rulebooks. Typically they will need not only to assess the impact of regulatory change within one jurisdiction, but will also have to map it against the other and apply compliance controls consistently across both regions wherever possible.
The devil is in the details. Both the EU and UK have made changes to specific aspects of the transparency requirements under their respective MiFID frameworks.
These amendments start to apply at different times, meaning that firms must juggle successive changes to the detail of the respective rulebooks.
Consistent interpretation
As the rules evolve and the rulebooks diverge, many firms struggle to ensure consistent interpretation of specific areas of EU-UK law. The risk is potential divergence of advice across legal teams and businesses, and duplication of effort and cost.
Before Brexit, firms may have had one office acting as their EMEA hub. Today the picture is likely to be more fragmented, with individuals covering multiple offices across different jurisdictions. This increases the importance of having knowledge management processes to help share house views and interpretations across a firm.
Having all the relevant rules and guidance in one place is a good start. Drawing on the same resources mitigates the risk of some individuals using out-of-date versions of the law.
Ideally, a ‘one-stop shop’ for regulation would be interactive to allow users to engage with the source materials. The meanings of defined terms should be easily accessible, and relationships between different parts of the rulebook should be linked. It would be even better to overlay the law with additional notes, commentary and links to further resources to help share know- how with the relevant individuals at the firm.
Your new legal compliance toolkit
The path to regulatory compliance has never been more challenging. Fortunately, a map is available. Linklaters Law Compare is an interactive and collaborative solution that
enables you to stay ahead of the rapidly changing regulatory framework.
Providing full coverage of the EU and UK MiFID regimes, a view of the rules is enhanced by legal commentary from Linklaters lawyers.
Subscribers to Linklaters Law Compare benefit from:
- Easy access to a definitive source of law and regulation
- Quick and efficient intra-regime and cross-regime comparison
- Live tracking of EU-UK divergence, including tracked changes and side-by-side perspectives
- The ability to annotate the rulebook and share these views with a team
- Access to additional commentary provided by Linklaters’ subject matter experts
- Powerful and dynamic rule maps, enabling increased efficiently with regulations
- Valuable anticipation of incoming regulatory change
- A critical path to legal compliance, enabling operations across multiple jurisdictions
The regulatory horizon may be uncertain, but Linklaters Law
Compare is there to guide you.
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