UK: Financial Services Regulation 2018: New Year Briefing

Although the subject of much derision at the time (and indeed since), Donald Rumsfield's baffling words have assumed a degree of resonance in these uncertain times. For firms, 2018 will bring plenty of known knowns: for instance, the PRIIPs Regulation, the Benchmarks Regulation and MiFID II all came into force while New Year hangovers were still being nursed – the headache will linger for some considerable time. For some institutions, they will be closely followed by PSD 2. Although many of these measures are subject to a good number of what Donald Rumsfeld might have referred to as "certain uncertainties", we do know to a very large extent what they involve for affected firms. Implementation issues will continue well into the New Year.

Aside from financial services regulation, but regulation nonetheless, there is an additional implementation headache for firms in preparing and being ready for the application of the EU General Data Protection Regulation (not covered in this briefing). This comes into force on 25 May 2018.

The extension of the SMCR regime to all financial services firms could be described as a known unknown, insofar as the FCA's proposals are now broadly clear, but the timing of implementation remains uncertain (although the FCA has proceeded on an assumption that the regime will not be extended to FCA solo-regulated firms until the middle of 2019 at the earliest).

However, can there be any known unknown bigger than Brexit? At the time of writing we know that Phase 1 negotiations have been finalised with an all-important agreement in principle and that the UK is seeking a transitional period from March 2019, during which, if agreed, it will largely be "business as usual" for UK firms despite being outside the EU – how long such a period will be is a matter for negotiation. With March 2019 only fifteen months away, it is still unclear as to what "end state" model the UK will be seeking for its future trading relationships. Even when that does become clear (or clearer) there is no certainty that the EU will agree to what the UK seeks. Financial service providers which currently rely on single market access will need to step up their Brexit contingency planning.

In this briefing we summarise some of those key known knowns and known unknowns which should be the focus of attention for firms in the coming year and beyond. As for the unknown unknowns, who knows? And there is always next year's New Year briefing …

1. BREXIT: A HARD ROAD AHEAD TO SOFT EXIT?

On 8 December 2017, the European Commission announced that, in its view, "sufficient progress" had been made to allow the Brexit talks to advance to the next stage, including the UK's future relationship with the EU. This was ratified by the European Council at its summit meeting on 15 December 2017. This means that there has been agreement in principle on the three issues which the EU said had to be agreed before talks could proceed to future trading relations: the protection of the rights of EU citizens in the UK (and UK citizens in the EU), the financial settlement that the UK will pay and the avoidance of a "hard border" between Northern Ireland and the Republic of Ireland.

For the "Phase 2" talks, the UK has asked that, to avoid a "hard Brexit" in March 2019, there should be a transition period of about two years following the withdrawal date during which the UK will remain part of the Single Market and the Customs Union. The negotiating guidelines issued by the Council of the EU indicate that the granting of such a transitional period will be conditional on the UK respecting: the whole of EU law, including new law that emerges during the transition period, budgetary commitments, judicial oversight and other related obligations. In short, the UK will remain subject to EU law and will pay for the privilege of Single Market and Customs Union access, whilst no longer having any say in the formulation of new legislation or membership of the European Parliament.

As regards what future relationship with the EU the UK is seeking, there is still a great deal of uncertainty. The Council of the EU has said that it needs more clarity as to how the UK sees the future relations: this, it is to be hoped, will become clearer over the coming weeks and months. The cabinet is due to discuss the "end state" the UK will be seeking. Will it be "Canada-style", "Canada-plus" or "Canada plus plus plus"? Since the trade deal with Canada (CETA) does not cover services the "pluses" must refer, at least, to financial services.

Whatever the model, Michel Barnier, the EU chief negotiator, has made it clear that UK firms will lose passporting rights for financial services after Brexit and there will be no access to the single market except in those areas where the legislation includes an equivalence regime and such equivalence has been determined. There will not, he says, be any bespoke trade deal for financial services.

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