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Could Brexit Bring MiFID III With It?

Posted by Jon Yarker on 28-Sep-2019 15:19:48




Odds are, you’re fed up of Brexit and MiFID II.

This has nothing to do with your personal politics or the kind of work your firm specialises in. As of the summer of 2019, EY calculated that the rolling Brexit bill of the financial services industry had surpassed £4bn with firms investing heavily in relocation costs, legal advice and contingency provisions. At 1.4 million paragraphs, MiFID II implementation has also been expensive project for financial services with consultancy Optimas estimating an industry wide implementation cost of €2.5bn (£2.2bn).

Overall, during the past few years a huge amount of time and money has been taken up by MiFID II compliance and Brexit planning.

Even though MiFID II has been implemented in the UK, uncertainty remains as – at the time of writing – Brexit is still the subject of extensive debate in Westminster. Uncertainty over Brexit is making a lot of businesses pause their future plans until the manner of the UK’s exit is confirmed.

Unfortunately, things could get worse.


Rumours are increasingly circulating that the fractious nature of Brexit could accelerate regulatory change and green-light the third generation of MiFID. But is this the case? Could Brexit bring MiFID III with it?

First, let’s look back at what we know. MiFID II is not going anywhere as it was implemented and became UK law while the UK was still an EU member state. Even in a no deal Brexit, this will still be the case according to the European Union (Withdrawal) Act 2018 which was drafted with specific contingencies for MiFID II:

‘Consistent with the government’s objective of providing continuity to businesses and consumers as far as possible, the policy approach set out in MiFID II legislation will not change after the UK has left the EU.’

Also as the FCA was instrumental in drafting much of MiFID II’s record-keeping and reporting principles, it seems unlikely that an independent UK would be involved in radically altering the finalised legislation.

Questioning if you know everything required of your firm’s communications? Test yourself by going through our checklist on MiFID II electronic communications requirements.

However, there are two key points at play

First, since MiFID II’s implementation, problems and criticisms have already begun to surface. As of June 2019, MiFID II still hadn’t been introduced into the national law of 17 EU member states (including Spain and Holland) which suggests either wide scale ambivalence or underlying issues with how the regulation is drafted. Plus, in locations where MiFID II has been embraced into national law, evidence suggests firms are still struggling to truly integrate this directive into their processes. For instance, despite MiFID II’s focus on reporting requirements, in 2018 one in four transaction reports submitted to the FCA (or 1,355 reports) were inaccurate.

Furthermore, loopholes in MiFID II have been identified and caused some critics to question whether redrafting is required. For instance, one area MiFID II was intended to target was dark pool trading but under the regulation the systematic internaliser (SI) regime still allows bilateral trading between firms and clients. Obviously this is problematic because by connecting to one another to create de facto multilateral trading venues, SIs can essentially recreate broker-crossing networks. Therefore, from a purely legislative standpoint, is a new iteration of MiFID required?

And second, following Brexit there will still be a need for alignment between the UK and European markets with harmonised regulation playing a big part in this.

With it being anyone’s guess as to how the UK’s relationship with the EU will look post-Brexit, some are concerned that confusion may arise over what role pre-Brexit regulations will continue to have. Difficult questions could be asked of the UK as a third country under EU law and how equivalency will work in reality, especially with such a major financial hub as London.

Both the FCA and ESMA have been active in their communications around this topic, assuring market participants whenever they can and issuing numerous guidance notes. However, until these authorities know what Brexit will actually look like it is hard for them to say anything material.

It is likely that MiFID III will occur at some point with former MEP Kay Swinburne, one of the architects of MiFID II, telling a conference last year: ‘I get asked if MiFID III is a myth or reality but it is always going to be a reality, its just a question of when it comes.’

There are uncertainties around Brexit and the future of MiFID II. However, both the FCA and ESMA have been vocal in their attitude towards deregulation and neither will want regulated firms taking advantage of potential mismatches between regulatory regimes. Therefore, it might be wise to assume they are more likely to issue new regulations in times of uncertainty than stick with the status quo. Brexit, and whatever form it takes, might just be the catalyst.

In the meantime, there is still plenty that can be done with firms’ ongoing compliance of MiFID II. In particular, Article 16 has been posing a lot of problems for firms when it comes to adhering to digital communications compliance. We recently created a comprehensive report on this specific part of MiFID II which you can access by clicking below.

A Guide to Electronic Communications in MiFID II, Article 16

Topics: MiFID, FCA, Financial Services, Asset Management