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Jun 29, 2016

What does Brexit mean for Mifid II?

IROs and investors alike should prepare for regulatory changes whatever the political outcome

Shock, confusion, uncertainty: this was the predominant reaction to last Thursday’s vote. While the landscape is shrouded in fog, there are areas of clarity. From an IR perspective, the current regulatory agenda is dominated by Mifid II – and here we can see the wood for the trees.  

UK financial regulator the Financial Conduct Authority (FCA) stated on Friday morning: ‘Firms 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 chancellor’s statement was similar: ‘Only the UK can trigger Article 50… In the meantime, and during the negotiations that will follow, there will be no change to… the way our economy and financial system are regulated.’

Mifid II will be in force from January 3, 2018. Even if the new prime minister invokes Article 50 at the earliest possible opportunity, Brexit will not occur before fall 2018.

We can also say with confidence these new rules will be here to stay. Mifid II may have been born in Brussels, but the FCA played a critical role in its conception, providing much of the intellectual heft behind the proposals. Because Mifid II is a directive, not a regulation, it is subject to local regulators’ interpretation. 

The FCA’s Mifid II consultation paper and policy statement, due in September and December 2016, respectively, will tell us how Mifid II applies in the UK. These will be local rules in the FCA’s Conduct of Business Sourcebook, applying regardless of whether the UK is in or out of the EU.

Quite apart from regulation, a tougher economic environment will accelerate the need for change. The sell side now has to contend with cyclical downturn and massive uncertainty on top of secular decline, regulatory intervention and technological disruption. Transactions will be put on hold, revenues will evaporate, lay-offs will not be long in coming. Service levels will continue to decline, meaning an even greater imperative for efficient, low-cost solutions.

For corporates, the importance of good IR will grow. Companies will have even more need for high-quality engagement with the buy side, explaining their relevance to nervous investors in an increasingly febrile environment. This will require good people, systems and engagement strategies. Leveraging new tools such as direct, confidential feedback can only help in this process.

At our Mifid II roundtable last Thursday there was a clear consensus that changes are happening and need to happen – the pressures are acute and the shifts structural. The ‘buy-side wallet’ has come down by half and is expected to halve again. Costs have to fall and technology offers a solution, not just for conflict elimination and efficiency, but also to bring new products and services that enable differentiation. 

From a regulatory perspective, change is driven by two critical issues: the transfer of risk in pension provision from governments and corporates to individuals, meaning these issues matter to the man in the street in a way they never did before; and the low-interest-rate – and hence low-return – environment. With interest rates at 7 percent, losing 1 percent to 1.5 percent in frictional cost to the system is sort of OK, but in a 0.5 percent interest rate world it is untenable, as it eats the majority of investor returns, hollowing out pension provision for millions of people. Brexit will only exacerbate these pressures.  

When uncertainty abounds, the temptation is to watch the unfolding drama from the sidelines. But whatever the political outcome, these new rules are coming, and the commercial case for change is even more compelling than before. Now is the time to investigate options and begin implementation.

Michael Hufton is founder and managing director of ingage IR