Seven years after the vote and Britain still feels European whilst not being in European Union. What’s the point of that? In particular, there’s a fair dilemma about regulations in banking in Britain. Should they stay aligned with the EU or go their own way? I guess the more telling question is: what was the point of Brexit if our regulations stay aligned with Europe?
The whole point was meant to be for more self-governance and yet, in most of what I see, we are maintaining parity to ensure ease of trade. For example, a report published by the UK Trade and Business Commission, recommends that the UK align with EU standards across most manufacturing and general goods trade.
In fact, what is notable about this report, is that the Brexit government in the UK led by the Conservatives has focused upon regulatory divergence from the EU. The next government, which is likely to be Labour, are calling for regulatory convergence with the EU.
Interestingly, even under the Conservatives, the UK signed a pact to increase co-operation on financial services with the EU during the summer.
However, as the BBC puts it: “describing this as an ‘agreement’ is misleading. It does not mean the UK is committing to align with the EU on regulation, nor conceding to any previous demands Brussels may have signalled, such as moving the processing of some euro-denominated financial instruments out of London. What it means is that both sides are committing to a regular twice-yearly meeting to discuss ‘voluntary regulatory co-operation on financial services issues’.”
So that’s just some outline agreement to meet twice a year for a chat.
Where this leaves the UK is in an interesting position, caught between the devil and the deep blue sea so to speak. The London School of Economics (LSE) sums it up well citing three intertwined challenges:
- to reform the domestic institutional framework of policymaking in finance, following the repatriation of these competencies to the national level;
- to determine the status of existing EU regulation already incorporated into national regulation, deciding which parts to keep and which ones to reform; and
- to set out a future course for UK financial policy, necessitating greater clarity over the extent to which this would entail convergence or divergence from future EU rules.
These are three difficult challenges that the UK does not seem to have come to terms with so far and, dependent upon which side of the fence you sit, are going to be hard to resolve. The more right wing, the more you want to spread your wings and tell the EU to get lost; the more left wing, the more you want harmony and agreement, and have the EU giving you gold stars. Or that’s the way it seems to me.
In fact, the most important part of the LSE’s commentary is here:
Intentional de-Europeanisation. The clearest evidence of the UK’s intention to diverge from existing EU rules through less stringent regulation comes from capital markets and non-banking financial institutions, such as investment funds. Hence, the government has proposed to support wholesale capital markets by relaxing regulatory requirements as currently stipulated in the EU’s Markets in Financial Instruments Directive II, and to consult on tailoring rules covering short selling, payment accounts, investment research, and tax treatment of fund management. Conversely, the UK may also intentionally diverge from EU practice by imposing tougher bank capital and liquidity requirements on its own banks, as it has done since 2010.
Passive de-Europeanisation may arise where the development of new EU rules generates divergence from the UK – for example, in the area of digital finance. In recent years, the EU has issued stringent new rules for crypto finance – the 2022 Markets in Crypto Assets Regulation. By contrast, UK regulators have been slow to develop new rules in this area and the government has repeatedly spoken positively about the benefits of promoting London as a ‘fintech hub’.
Failed de-Europeanisation refers to the UK’s attempt to gain a competitive advantage through divergence being stymied or limited by parallel developments at the EU level. Successive UK governments have consistently championed two reforms as yielding a post-Brexit ‘dividend’ for the City: creating new opportunities for infrastructure investment by replacing the EU’s controversial Solvency II Directive for insurance firms; and efforts to encourage overseas firms to raise capital in London by simplifying the UK Listings Regime (based on the EU Prospectus Directive). Yet, in both cases, the EU has subsequently proposed similar reforms, thus narrowing any potential divergence.
No de-Europeanisation. This is most likely in areas characterised by high levels of cross-border interdependency – such as the clearing of euro-denominated derivatives by London-based central counterparties. Here there is significant pressure for active regulatory alignment to underpin the continuation of the current temporary regulatory ‘equivalence’ arrangements between the EU and UK which facilitates access to London-based clearing houses by EU-based financial institutions.
All in all, we seem to have no clear view of what Brexit means to financial services and regulatory alignment or separation. Meanwhile, perhaps more noteworthy, is that the loss of jobs in the UK financial markets due to Brexit is minimal – most estimate around 7,000 jobs lost whilst pre-Brexit some forecast that 75,000 jobs would disappear – but that deoes not account for the job losses in the wider economy (330,000 at last count).
The way that Brexit pans out over time will be interesting, but if we do stay aligned with the European rules and regulations then I come back to the critical question: what was the point of Brexit?
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...