Issue link: https://maltatoday.uberflip.com/i/1175418
10.10.19 5 IN February this year, the European Commission published a Draft 200- page Agreement on the withdrawal of the United Kingdom from the European Union. A lot has happened since then, and hopefully we are that much closer to knowing whether it's a deal or no deal. A deal would ensure an orderly withdrawal through various meas- ures aimed at minimising disruption, managing the transition and provid- ing legal certainty going forward - not least in financial services. e technical details would only unravel in due course, but under this scenario one would ex- pect positions to converge around en- suring early conclusion of the respective equivalence assessments and close con- sultation on regulatory and supervisory matters, while respecting each party's regulatory and decision-making auton- omy. On the other hand, the risks of a no deal have been, until now, the main area of focus and concern for both Eu- ropean and national regulators. From a financial stability perspective, a no- deal Brexit could potentially give rise to higher financial market volatility with potential negative consequences for in- vestment and growth. From a business perspective, the abrupt cessation of passporting arrangements could come at a great cost, even if the disruption is only temporary. Brexit affects all segments of financial services activity between the UK and the EU-27. As it stands, the "passporting" mechanism makes it possible to conduct financial services on a cross-border basis throughout the entire EU, without the need to establish a subsidiary or branch in the individual Member States. Simultaneously, passporting also means that infrastructures such as EU trading venues, central counterparties (CCPs), trade repositories (TRs) and central securities depositories (CSDs), are permitted to serve members from anywhere in the EU. e following are some hard num- bers quoted in a study conducted by the Deustche Borse in December 2018, demonstrating the 'centrality' of the UK to the financial services industry: • e UK accounts for up to 80% of EU activity in certain financial market segments; • More than 50% of European equity trading is executed in the UK; • e UK handles 77% of euro-de- nominated transactions, 78% of European foreign-exchange trad- ing and 74% of European interest rate derivatives trading; • 50% of European fund manage- ment activities (by assets) take place in the UK. Contingency planning apart, a no-deal Brexit simply means a discontinuation of these cross-border services and disen- gagement from the relevant underlying infrastructures from day one. Hard as it is to imagine a scenario where negotia- tions will not have to continue long after a no-deal exit, a less (rather than more) uncertain post-exit scenario would be even harder to imagine. EU preparations To mitigate against this scenario, the European Commission has issued a number of preparedness notices and consistently encouraged all stakeholders to prepare for all different scenarios, in- cluding a no-deal. A number of Member States, including Malta, have also adopt- ed temporary contingency measures at national level to address residual risk. Based on a joint analysis of no-deal risks within the European institutions, and analysis by a joint technical group set up between the European Central Bank and the Bank of England, the Commission also adopted time-limited equivalence decisions for UK market infrastructures (CCPs and CSDs) to mitigate against fi- nancial stability risks. Memoranda of Understanding with the UK regulatory authorities, similar to those currently existing with third coun- tries, are another essential aspect being addressed, as these will ensure that EU and national regulators have the nec- essary co-operation and information exchange frameworks in place to con- tinue to meet their mandates. To this end, the European Securities and Mar- kets Authority, together with national competent authorities, has entered into multilateral MoUs with the UK's Finan- cial Conduct Authority and the Bank of England. Other multilateral MoUs are being finalised in banking, insurance and pensions regulation. Malta perspective From a macro- point of view, consid- ering the relatively high reliance of the Maltese government and core domes- tic banks on domestic funding, coupled with the necessary steps taken by Mal- tese authorities in cooperation with EU relevant authorities, direct financial spill-overs in the local financial services sector should be contained. On the ground however, the MFSA has been closely following developments and engaging with licence holders from the early stages, liaising closely with other European institutions, carrying out reg- ular assessments and providing guidance as the situation unfolded. Credit and Financial Institutions, as well as Insurance entities, were contact- ed directly on a one-to- one basis, while investment services providers were con- tacted industry-wide through Circulars and the setting up of a dedicated Work- ing Group. Banks and financial institutions pass- porting to the UK were asked to confirm that they have applied for recognition under the UK Temporary Permissions Regime. Impact assessments were also carried out by the Authority on UK- based banks which could possibly be actively exercising passporting rights in Malta. On its part, the local insurance sector has undergone a degree of adjustment in anticipation of the impact Brexit was expected to have on the market. While some Malta-based entities passporting insurance services have transferred their UK portfolio and ceased writing busi- ness in this market, a very small num- ber of others re-located their operations to Gibraltar. In the other direction, a number of companies servicing the EU market chose to establish operations in Malta. An impact analysis on the investment services sector led the MFSA to adopt a Temporary Permissions Regime for UK investment firms, asset managers and in- vestment funds passporting into Malta. e regime would be applicable only for a definite period, by the end of which the relevant entities would need to phase out all existing contracts or obtain the neces- sary authorisation to continue business in Malta. From a market infrastructures perspective, no major implications are envisaged in view of the equivalence status given to Central Counterparties and Central Securities Depositaries to smoothen the transition. Conclusion In the longer term, the UK's departure from the single market is bound to im- pact the financial services landscape in a significant way, although it is difficult to envisage what shape this will take and what role Malta's financial services could be playing in this new environment. In the short term, however, the scenar- io for Maltese financial services immedi- ately post-Brexit is not expected to un- dergo fundamental changes. An amount of adjustment has already been under- way for some time, and further adjust- ment is expected to continue, depending on what kind of Brexit we end up having. In the meantime, steps have been taken to mitigate the impact of a hard Brexit as much as possible and firms are requested to continue working on their contingency planning and updating the MFSA on any difficulties encountered in the transition. e MFSA will, on its part, continue to co-ordinate with its European and UK counterparts to ensure the minimum disruption possible, taking the appro- priate measures to address the situation within the prevailing legislative frame- works. SPEECH BY JOSEPH CUSCHIERI - CEO, MFSA