Brexit: keep calm but be vocal in lobbying negotiators
The UK is home to the world’s leading centre for financial services, and in recent years a thriving centre for fintech innovation. Elizabeth Budd, financial regulation expert at Pinsent Masons, urges the financial services industry to be vocal about the framework it needs to have in place to protect this status, and continue to do business with the European Union following the country’s vote to leave.
Determinations of equivalence
Unpicking 40 years’ worth of regulatory and legal evolution in the form of directly-applicable regulations, and domestic legislation in line with UK directives, is time intensive and laborious, and not necessarily in everyone’s best interests overall.
What is most likely to happen is an Act of Parliament to maintain the status quo so that domestically there is certainty of the law. In the interim European Council President Donald Tusk said that there would be “no legal vacuum” in light of the UK’s Brexit vote and that “until the United Kingdom formally leaves the European Union, EU law will continue to apply to and within the UK”.
UK financial services regulation is unlikely to suddenly deviate from that which currently applies throughout the EU. Much of the existing regulation is enshrined in UK law so we will realistically see is a subtle divergence in regulatory requirements over time.
The message coming from the EU is that the UK will not be able to cherry pick which parts of EU legislation it wants to adhere to and have the benefit of. Bearing in mind that the free movement of people was one of the major concerns of the Leave campaign it is currently difficult to see how adopting the EEA “Norwegian” model which permits free movement of goods and services with the quid pro quo being the free movement of people, will be politically palatable.
With limited time to negotiate an exit the focus is therefore likely to be on equivalence and the ability to establish branches.
The UK should have equivalence at Brexit date but the opportunity is there for banks, insurers and investment management firms to first identify the core requirements stemming from EU regulations and directive for “third country” equivalence, and then lobby the government to maintain those requirements whilst making the UK an attractive place to do business.
It is worth noting that some major third countries, including the US, do not have equivalence across the board, and this has not prevented them from conducting substantial amounts of business with EU-based clients.
Attractive to talent
There is an argument that a period of lingering uncertainty in light of the vote could weaken the attractiveness of the UK as a financial services centre, and a hub for fintech innovation and investment. Yet, the UK – and London – will remain an attractive location for financial firms to operate from, due to the FCA’s progressive approach to regulation, particularly for fintech firms; its geographic location; and the access it provides to established financial institutions. These are just some of the main reasons why fintech firms across the industry choose to make their base London and not other financial centres.
Whether the UK continues to attract the diverse talent pool it has become accustomed to remains to be seen. However, a significant part of London-based fintech emanates from the large fintech industry of the US, which has naturally gravitated to London not least because of the general ease of doing business. This ease of doing business is only partly dependent on being part of the EU.
Other financial centres in Europe, such as Frankfurt, Dublin and Paris (and for fintech the growing industry in Berlin) may well try to exploit any lingering uncertainty about the UK environment to attract a greater share of financial services business, and will mean that some financial firms could now reconsider how they structure their European operations.
We can be fairly certain that there won’t be a mass exodus of banks and other financial institutions from the UK. They will not want to make rash decisions or cause too much disruption with any restructuring. But instead give careful consideration to what their futures in the UK look like and wait for an outcome from broader talks over the terms of an equivalence regime.
Adding to the complex environment
Brexit is not solely responsible for the current state of the financial services industry. Pressure has been building on financial institutions since the financial crisis. European banks are still holding too much debt and balance sheets they can’t de-lever. There’s a continual effort to cut costs as the situation has made it too difficult to generate profits and a decent return on equity.
Regulation – whether Basel III or MiFID II, as just two of the impending regulatory initiatives – has had an impact on the banking industry, either requiring banks to become more risk averse or diminishing the revenue pool.
These trends combined with Brexit leave the financial services industry in a difficult and potentially vulnerable situation. Any changes financial institutions make in the coming weeks and months should be seen as the result of the existing situation as much as the decision to leave the EU.
But there is hope, as Bank of England Governor Mark Carney said that the UK’s central bank had “engaged in extensive contingency planning”, and that “the capital requirements of our largest banks are now ten times higher than before the crisis”, meaning that the we were “well prepared” for the recent upturn in the markets.