MFSA’s Assessment of Possible Brexit Impact on Key Areas of Financial Markets

Is the UK Heading Towards a Hard Brexit?

As the UK Government steps up its efforts to achieve Brexit by the current deadline, which is 31 October, the probability of a Hard Brexit is now higher than ever. Hard Brexit, which is the popular reference for a scenario in which the UK leaves the EU without a deal. Since the UK joined the European Communities (EC) in 1973, some 45 years ago, it has become increasingly intertwined with the rest of the EU through policies and agreements intended to ensure seamless trade between EU members.  Moreover, the UK is a member of many European institutions as well as of EU bodies that govern rules on everything imaginable.

These harmonised laws, rules, policies and institutions bestow the free movement of goods, capital, services and labour within the EU to all individuals and businesses that are citizens of EU Member States, or based in such States. These benefits of the EU do come with the requirement to surrender some national sovereignty to the EU, and EU law prevails if it comes in conflict with national law. This is to ensure the harmonisation between the Member States without which the four freedoms are not possible.

Since the UK is so closely intertwined with the EU after 45 years, it has become dependent on the EU for many crucial areas, including the economy, and even its own internal stability, such as in the case of Ireland. For this reason, there are fears that a drastic exit without a deal, a Hard Brexit, between the UK and the EU would lead to the total disruption of the movement of goods, capital, services, not to mention labour, between the UK and the EU, though the UK has become heavily dependent on such free movement. Tariffs would start to apply to most British goods going into the UK. Border checks would also slow movement tremendously. Services could be hit badly, especially with respect to financial services.

Malta’s Temporary Passporting Rights to UK Entities

Malta and the UK have shared a common history in the Mediterranean for hundreds of years. Moreover, in the same way that London has become a major hub for financial services, Malta is now becoming an equally important hub for financial services in the Mediterranean. For this reason, Brexit is particularly important for Maltese and UK firms and investors who carry out business with each other. Thus, the Maltese financial regulator, the Malta Financial Services Authority (MFSA) has been busy preparing for the eventuality of a Hard Brexit for quite some time. The MFSA provides financial services stakeholders with updates on applicable transitional measures. Its key objective is to ensure that licenced entities continue business with minimal disruption. These licenced entities are Maltese, but the MFSA makes efforts to provide to UK entities, conditional equivalence status and other measures in certain scenarios. It has, for example, granted Temporary Passporting Rights to UK entities that already passport their services and activities to local clients. All these measures however are temporary and remain subject to decisions and recommendations as may be made by the European Banking Authority, the European Insurance and Occupational Pensions Authority, and European Securities and Markets Authority.

The key document that outlines the MFSA’s position on this matter is the FAQ on the Implications of a Hard Brexit on the Local Asset Management Industry. However, at the end of August, it issued a succinct overview of the eight key areas that could be impacted by a Hard Brexit. Following the existing structure of the FAQ, the eight areas are the following:

• Possible system changes for UK brokerage firms servicing Maltese clients since the provision of brokerage activities is governed by MiFID II, AIFMD and EMIR, UK entities will lose their passporting rights. However, if brokerage services are initiated by a Maltese fund, there should be no impact on the provision of brokerage services by UK entities. After Brexit, UK firms should be able to provide brokerage services to Maltese clients in terms of Article 39 of MiFID II and Regulation 3 of the Investment Services Act (Provision of Investment Services and Activities by Third-Country Firms) Regulations, 2017.
• UK Undertakings for the Collective Investment in Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) will need to offer funds in Malta under the National Private Placement Regime (NPPR) not under the UCITS directive nor under the Alternative Investment Fund Managers Directive (AIFMD).
• New Maltese UCITS should seek guidance from UK Financial Conduct Authority (FCA).
• Three options for UK-managed AIFs – Maltese AIFs managed by UK AIFMs have three options in case of a Hard Brexit. They can either appoint an EU AIFM, convert to a Maltese PIF, or convert into a self-managed AIF. Similarly, Maltese UCITS managed by a UK UCITS ManCo would have to either convert into an EU UCITS ManCo or into a self-managed UCITS.
• Investment management delegation will remain possible.
• UK depositories will not be allowed to perform direct depository services however UCITS and AIFs may delegate the provision of custody services to third-party custodians, therefore, allowing UK depositories to continue acting as sub-custodians.
• Changes to UCITS asset eligibility criteria – Hard Brexit may impact asset eligibility criteria in serval ways.
• Business as usual for UK-managed Maltese PIFs – Maltese PIFs managed by UK firms will not be impacted by Brexit.

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