UK MiFID financial regulatory passport in peril as EU ministers take tough stance on Hard Brexit

One of the key concerns of the Retail Forex sector when it comes to the uncertainty surrounding Brexit is: Will EU regulated brokers be able to continue to passport their regulation into the UK?

A similar concern of UK-based, FCA regulated brokers is: Will we be able to continue to serve EU based clients, without requiring further licensing?

Based on recent tough talk by key EU ministers, the answer to both questions seems to be a resounding No.

France FinMin Michel Sapin: tough talk on Brexit

France FinMin Michel Sapin: tough talk on Brexit

Senior UK officials, most notably newly moderate British Foreign Secretary Boris Johnson, are openly discussing an open relationship with the EU post Brexit which they hope will include financial passports being protected even as Britain leaves the EU Single Market. Many UK banks and money managers rely on the passporting to be able to serve their clients across Europe.

However EU officials are indicating otherwise.

Speaking this week at the EcoFin meeting of Europe’s finance ministers in Luxembourg, French Finance and Economy Minister Michel Sapin took a very hard stance, telling CNBC that “you can’t bend the rules.”

Leading EU countries such as France and Germany certainly have incentive at this stage to back a Hard Brexit which will isolate the UK. If the UK is removed from the passporting game, UK based firms will need to turn to France or Germany (or somewhere else in the EU) to establish operations and receive separate licensing if they want to serve clients outside the UK.

And more importantly, foreign financial companies will think twice about setting up European headquarters in London, as many if not most companies now do.

Along those lines, Russia’s VTB Bank announced this week that it will be moving its investment banking HQ out of London in the coming months, considering locations such as Paris, Frankfurt, or Vienna. VTB isn’t exactly JP Morgan or HSBC, but it is Russia’s second largest bank (after Sberbank). Other global financial giants are sure to follow suit if a Hard Brexit becomes a reality.

France as well as Germany and the Netherlands will be having upcoming national elections (France’s will be in six months), and tough anti-UK rhetoric seems to be very popular with the electorates right now. Another reason why the EU is likely to stand firm on a Hard Brexit.

Economic historians know, however, that the EU and its individual countries often find a way to shoot themselves in the foot when opportunity is on the horizon. And that bullet which could prevent a place like Paris or Frankfurt from taking a serious run at London as a financial center might be the proposed EU Financial Transaction Tax (or ‘FTT’).

France and Germany are still talking as if they still plan to support implementation of the FTT. The FTT, as proposed, would impact financial transactions between financial institutions charging 0.1% against the exchange of shares and bonds and 0.01% across derivative contracts, if just one of the financial institutions resides in a member state of the EU charging FTT.

The FTT’s implementation has been negotiated and renegotiated, and delayed several times. However current discussions among supporting EU countries, including Germany and France, point to an early 2017 enactment.

If the FTT in fact becomes a reality, non-EU companies will certainly think twice about relocating outside the UK, Hard Brexit or not.

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