FCA Warns EU Regulator Not Doing Enough To Help Stock Markets

The EU regulator has made concessions over stock trading in a no-deal Brexit, but the FCA says volatility and liquidity risks are still exist

James Gard 29 May, 2019 | 3:31PM
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Theresa May Resigns

The Financial Conduct Authority has warned that EU restrictions on share trading in the event of a no deal Brexit could cause disruption to investors and affect liquidity.

EU financial regulator ESMA announced plans in March under the “share trading obligation” that would have restricted – if the UK had left the EU without a deal – the trading of certain stocks with a UK code (or ISIN) to within the EU. This would mean that, in the event of a no deal Brexit, a German fund manager, for example, would have to trade UK blue-chips on a European stock exchange rather than the London Stock Exchange. 

This would be a problem for EU investors trading stocks whose main listing is on the London Stock Exchange as there would be more liquidity, and hence better prices, on the home market. From the UK's perspective, it could divert money away from the London Stock Exchange to the continent. 

ESMA lifted the restrictions on all but 6,243 stocks (out of 23,000) in March. Today it announced a further 14 UK stocks which would be exempt from the trading restrictions, including oil companies Shell (RDSB), BP (BP.), pharma giants GlaxoSmithKline (GSK) and AstraZeneca (AZN) and mining firms BHP (BHP) and Rio Tinto (RIO).

ESMA said the decision had been made after careful consideration and consulting with industry bodies and country regulators. 

The FCA welcomed the move but warned that many shares with European codes are listed in London, so the distinction between UK and EU equities doesn’t reflect trading realities. “This approach would place restrictions on a company’s access to investors and freedom to choose where they seek a listing on a public stock market,” the FCA said.

The FCA recommends that ESMA treats UK and EU shares equally even in the event of a no-deal Brexit, maintaining the status quo “for a limited period of time until a longer-term solution can be found”. The FCA said it is currently working with ESMA to minimise diruption in the event of a no-deal Brexit and work on solutions.

Passporting Rights

EU regulations have been caught up in the turmoil over Brexit. The UK’s current financial regime is tied to EU laws and we are a “rule taker” with respect to City regulation.

Brexit with a deal would have given UK financial services “equivalence” with the EU regime for a transitional period to minimise disruption and to give UK regulators time to prepare their own regime.

Regulation introduced in 2004 established a “passporting” regime that allows financial products such as funds and ETFs to be sold and marketed across the UK. A British retail investor can buy a fund from a German asset manager, for example, and vice versa.

Under Theresa May’s proposed Chequers deal, which has since foundered, the UK would remain in a customs union for goods but not services, so passporting would have faced significant threats even if the deal had passed Parliament. Now that May has resigned and a number of no-deal Brexit candidates are vying for her job, the risks of this scenario appear to have increased.

The Bank of England warned last month, before May resigned, that the risks of a disorderly Brexit remain “alarmingly high”.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
AstraZeneca PLC12,110.00 GBX-0.46Rating
BHP Group Ltd ADR61.47 USD2.42Rating
BP PLC491.30 GBX0.41Rating
GSK PLC1,775.00 GBX-0.48Rating
Rio Tinto PLC Registered Shares5,785.00 GBX2.41Rating

About Author

James Gard

James Gard  is senior editor for Morningstar.co.uk


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