Breakfast Meeting Recap | Joseph Cuschieri

Contingency planning apart, a no-deal Brexit simply means a discontinuation of these cross-border services and disengagement from the relevant underlying infrastructures from day one

MFSA CEO Joseph Cuschieri
MFSA CEO Joseph Cuschieri

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  measures  aimed  at  minimising disruption,  managing  the  transition  and  providing  legal  certainty  going  forward  -  not  least  in financial services. The technical details would only unravel in due course, but under this scenario one would expect positions to converge around ensuring early conclusion of the respective equivalence assessments and close consultation on regulatory and supervisory matters, while respecting each party’s regulatory and decision-making autonomy.

On the other hand, the risks of a no deal have been, until now, the main area of focus and concern for both European 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 investment 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.

The following are some hard numbers quoted in a study conducted by the Deustche Borse in December 2018, demonstrating the ‘centrality’ of the UK to the financial services industry:

  • The 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;
  • The UK handles 77% of euro-denominated transactions, 78% of European foreign-exchange trading and 74% of European interest rate derivatives trading;
  • 50% of European fund management 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 disengagement from the relevant underlying infrastructures from day one. Hard as it is to imagine a scenario where negotiations 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, including a no-deal. A number of Member States, including Malta, have also adopted 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 financial stability risks.

Memoranda of Understanding with the UK regulatory authorities, similar to those currently existing with third countries, are another essential aspect being addressed, as these will ensure that EU and national regulators have the necessary co-operation and information exchange frameworks in place to continue to meet their mandates. To this end, the European Securities and Markets Authority, together with national competent authorities, has entered into multilateral MoUs with the UK’s Financial 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, considering the relatively high reliance of the Maltese government and core domestic banks on domestic funding, coupled with the necessary steps taken by Maltese 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 regular assessments and providing guidance as the situation unfolded.

Credit and Financial Institutions, as well as Insurance entities, were contacted directly on a one-to-one basis, while investment services providers were contacted industry-wide through Circulars and the setting up of a dedicated Working Group.

Banks and financial institutions passporting 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 business in this market, a very small number 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 investment funds passporting into Malta. The 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 necessary 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.


In the longer term, the UK’s departure from the single market is bound to impact 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 scenario for Maltese financial services immediately post-Brexit is not expected to undergo fundamental changes. An amount of adjustment has already been underway for some time, and further adjustment 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.

The MFSA will, on its part, continue to co-ordinate with its European and UK counterparts to ensure the minimum disruption possible, taking the appropriate measures to address the situation within the prevailing legislative frameworks.

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