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How to unpick a 40-year-old EU rulebook?


In light of the vote to leave the EU, assuming the UK financial services industry wishes to continue to trade with the EU with the same freedoms as at present, broad equivalence with EU financial regulation will be in its best interests.

Banks, insurers and wealth management firms will now have to identify the core requirements stemming from EU regulations and directives that they need in order to achieve this, and then lobby the Government to stick to these requirements as they negotiate the terms of the UK’s exit from the EU.

The UK will, of course, have equivalence today. 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 we are likely to see is a subtle divergence in regulatory requirements over time. For example, given the UK’s position against the bankers’ bonus cap, the assumption is this will be one of the first EU-led initiatives to change . But it remains to be seen how this would be done, and to what extent this would impact on equivalence negotiations.

It should be noted some countries, including the US, do not have equivalence across the board, which has not prevented them from conducting substantial amounts of business with EU-based firms.

The vote to leave the EU means some financial firms may now reconsider how they are structured for European operations. It is uncertain what arrangements might be agreed in place of the current passporting arrangements that many London-based firms use to avoid the need for multiple authorisations across Europe.

It seems likely the UK will push to negotiate an equivalence regime to replace passporting when the UK’s membership of the EU expires, to allow UK-based firms to continue to access other national markets in the EU relatively easily.

However, those negotiations are likely to take place within broader talks over the terms of the deal confirming the UK’s EU exit . This is likely to take many months, and quite possibly years, to conclude.

Some UK-centred companies with business across Europe could look to relocate to other European financial centres such as Frankfurt, Paris, or in some cases Dublin.

They may view passporting rights as so central to their operations that they are not prepared to endure uncertainty whether an equivalent regime would allow them to continue to use London as a base for Europe-wide activities. Those other financial centres may well view the UK’s exit from the EU as an opportunity to increase their influence and it is conceivable this could complicate agreement on an equivalence regime.

However, London is not just a major financial centre because it is a gateway to Europe through the UK’s EU membership and associated passporting regime established by EU law.

London is also an important centre for markets outside the EU, and will continue to be so even with the UK leaving the union. Firms will not necessarily be looking to move their central hub from the City.

From a regulatory perspective, I do not expect UK financial services regulation to suddenly deviate from that which currently applies throughout the EU. Much of the existing regulation is enshrined in UK law so any changes in approach will realistically come about gradually over a period of time.

 Michael Ruck is senior associate at law firm Pinsent Masons



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. A good analysis but I think the political dimension needs to be considered. I agree that what would suit the book of the UK financial services industry going forward is the EFTA model. But that would mean accepting free movement of people and budget contributions and as these are two elements that seemed to weigh heavily with Leave voters maybe this is not an option, unless whoever takes over as PM sells Leave voters down the river. Also the EFTA model means UK would have no voice in future EU Directives on financial services ( so also a sovereignty issue). We also need to remember that it is not just a case of the UK getting whatever deal it wants. The EU and the 27 individual Member States are not going to give the UK a position that is more favourable than being a member of the EU. So it is quite possible some other Brexit model may be on the table from the start, or that the UK will be forced into an alternative model.
    Given all this uncertainty and the fact that there will be just two years to Brexit from the Article 50 notification I think what I would be looking for as a regulator is a quick fix on the legal front to give a breathing space to fims ( and the regulators themselves) and then worry about whether anything in the regulatory could or should be changed after Brexit has happened. What do I mean by a “quick fix”? I think the lawyers need to find some way to ensure that when Brexit happens the UK has rules which are equivalent to the EU ( which would satisfy any future post- Brexit model) and that these rules are adopted without the need for consultation ( I don’t know how much is currently in the FCA/PRA rules but there will surely be some stuff – directly applicable EU Regulations – where the UK will have to write its own version). Any changes to the rules can be taken at a lesiurely pace thereafter.
    Also, however, it needs to be borne in mind that Brexit is going to place a heavy burden not just on the UK regulators but also those in Brussels and other Member States ove the next few years. So I think it is not just the UK but also the EU which should be putting on the shelf for the time being future possible changes to the regulatory regime – for example, the Green Paper on Retail Financial Services.

  2. The people have spoken and the majority have opted to be bold, brave, and forward thinking !

    I would like to see the policy makers do the same……….. don’t start to fudge the rule books, no quick fixes, don’t start to re-arrange the deck chairs.

    Be Bold, Be Brave, look to the future……… burn the rule books, and regulation (we know they are not fit for purpose)……. re-build it and this time get it right, make it comfortable, make it fit and make it stand the test of time.

    Don’t forget…….. by and large, its the rule book, regulation, and legislation that drove people to vote exit, the EU…..

    People don,t want to be treated like 5 year old’s, patted on the head, then turning away (muttering) yes he means well, he may be right but we are going to do it our way anyway, what does he know !

    • 100% correct. We have golden opportunity to scrap everything that is bad/wrong with the current system and start a-fresh. Forward looking, forward thinking, dynamic, and totally fit for purpose regulation really will mean the UK has world leading regulators.

      They need to start now with this process and have it running in the background so they can hit the “go button” the day that we become free from the EU dynasty.

      The one tiny tiny problem as I see it is this. Unless the Mr Bailey sees this the same way and has a total clean out of the old regime, it will not work. What we will get is something that is more fudged and they will still be trying to drive square pegs into the round holes. The reason for this is that is the only thing they.

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