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Although it might be fair to say that the UK financial services
industry was not exactly pro-Brexit, there were those who saw it as
an opportunity to improve regulation. There is undoubtedly some
truth in this and Brexit may well present opportunities to
recalibrate financial service regulation so that it fits better
with UK business and consumers. The UK Chancellor, Rishi Sunak, was
right when he said that EU regulation was often the result of a
compromise between 28 member states and was, therefore, unlikely to
the right approach for the UK in every respect1. Anyone who has had
any involvement in Brussels law making will know the adage that
only when nobody is happy has a good compromise been reached!
However, people should be careful what they wish for. In all the
rhetoric about EU regulation, some people lose sight of two things:
first, that the UK was influential in the development of the
current raft of EU regulation; and second, many of the rules that
are most disliked were actually driven by the UK (it could even be
argued that the EU actually constrained the UK in how far some of
these rules went). Under MIFID2, some of the rules that people
seemed most excited about removing actually fall into the two
second category above. Investor protection rules, such as research
unbundling rules and strengthening best execution (including
through the provision of data under the so called RTS 27 and RTS
28), are great examples of this. Those hoping for
Singapore-on-Thames are (to borrow a famous, but unfair,
expression) are likely to be very disappointed.
Instead, on these areas, it always seemed more likely that the
EU would be the ones to roll back standards. This is precisely what
we are seeing in the so called MIFID2 quick fix currently under
negotiation in Brussels. Supposedly to address urgent deficiencies
in MIFID2 connected to the current Covid-19 pandemic, the European
Commission have proposed, among other things, to recalibrate the
research unbundling rules and suspend some best execution
reporting. What the Commission actually proposed was quite a
targeted, well balanced proposal with clear rationale. On the
research unbundling, there were proposals to recalibrate the rules
to help mitigate some of the negative impacts on SME research that
had been reported in some member states. On best execution, the EC
proposed temporarily suspending the so called RTS27 reporting
requirements, which require execution venues (in a very broad
sense) to report standardised execution quality data on a quarterly
basis. RTS27 has been particularly problematic for venues to
produce and, as the Commission notes, there is little evidence of
its use.
As stated, on the face of it, the Commission's MIFID2 quick fix
proposal seems proportionate and targeted. It would be very
difficult to find anyone in either regulatory or industry who think
that these changes are anything other than technical and sensible.
However, it seems that the pressure in Brussels is pushing for
further and more radical deregulation. The Council (the member
state governments) look to have agreed to go further on the
recalibration of research unbundling, while the European Parliament
appears to be advocating a more substantial weakening of the best
execution rules. Some members of the European Parliament have
proposed suspending the RTS28 requirements alongside RTS27. RTS28
is reporting by asset managers of how they route their client
orders, something that is important to see if the best deals are
being sought. This reporting, unlike RTS27, is only on an annual
basis and is much more focussed, covering only the top five
executions venues being used. Furthermore, the data was more
grounded in longer standing best execution rules and is much more
manageable and usable comparable than RTS27 data. It is interesting
to see Parliamentarians advocating for this rolling back rather
than opposing it - after all it would be expected that they would
be champions of regulation aimed at providing investors, who are
their voters, a better deal.
All of this provides a fascinating insight and reality check
into how things might move after Brexit. The UK used a lot of
negotiating capital on the original MIFID2 implementing a regime to
protect investors and, without UK influence, Brussels looks like it
might roll back such regulation for the EU. This might disappoint
many UK businesses and also contradicts the rhetoric around Brexit
that has been emerging from Brussels. We'll certainly be watching
closely where this debate goes.
Posted 08 October 2020 by David Cook, Executive Director, Regulatory Affairs, IHS Markit
IHS Markit provides industry-leading data, software and technology platforms and managed services to tackle some of the most difficult challenges in financial markets. We help our customers better understand complicated markets, reduce risk, operate more efficiently and comply with financial regulation.
