More details are emerging on the shape of the UK’s post-Brexit financial regulatory regime, and it is becoming increasingly clear that scope for radical action is somewhat muted.
What is happening?
There’s been much talk of ‘big bangs’ and deregulating financial services in the UK — particularly among the free-marketeers on the political right. The thinking goes that now the UK is liberated from the EU’s ‘dead hand’ it can now pursue a highly competitive regulatory regime, breathing new wind in the City of London’s sails to help it scale new heights.
The sad reality for those promulgating such ideas is that the UK is quite restricted in its room for manoeuvre, and that is almost regardless of the EU.
Take prudential regulation for example. Nearly the whole world subscribes to the Basel framework as a basis for sound prudential regulation that sets minimum capital standards. Deviate too far from those standards and the UK’s banks will soon be perceived as too risky to deal with by other jurisdictions and institutional investors.
There’s more freedom of action in terms of capital markets rules. But here too, jurisdictions are expected to adhere to certain levels of transparency and investor protection, and to enthusiastically stamp out market abuse and financial crime. Failure to do so will lead to markets in that jurisdiction being shunned by international financial institutions.
It is also worth remembering that all these rules were borne out of the 2007–2009 global financial crisis and were heavily influenced by the UK.
Why is it happening?
The UK left the EU on January 31 and has to consider the competitiveness of the City of London, while also regaining business that was lost owing to the ending of passporting rights into the EU.
However, despite radical action being restricted by international norms and agreements, the UK is not completely straightjacketed.
In emerging areas of finance where globally agreed rules are yet to be forged, such as cryptoassets and artificial intelligence, the UK does have an opportunity for blue-sky thinking, to leap ahead of the pack and to potentially set international norms. Here, freedom from the EU’s obsessions with integration and its safety-first approach, does provide UK policy-makers with greater flexibility and nimbleness.
Where global standards are well entrenched, the UK has an opportunity to come up with a more flexible and proportionate approach that does not undermine what those rules are designed to achieve — namely financial stability and consumer protection.
What do the bankers say?
This might come as a surprise to some, but bankers are not calling for deregulation.
The Banker has spoken with many people from different areas of the industry and the message is more or less the same: strong regulation is a competitive advantage for the City of London; do not mess with that. What bankers are asking for is a more proportionate approach to regulation, for reporting requirements to be better applied, and for supervisors to be more nimble and flexible over new growth areas, such as fintech and climate finance.
Will it provide the incentives?
The UK has a strong incentive not to rush down a deregulatory rabbit hole. Also, without strong global standard setters, such as the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions, regulatory and capital fragmentation would be far worse. The UK should endeavour to support them even more in coordination with other leading financial centres. ‘Bumpy’ playing fields would potentially stunt the City’s fortunes and international finance generally.
Besides, people want to conduct business in a fair and well-regulated environment. It is therefore essential that the UK maintains good regulatory standards and potentially enhances its many advantages, such as its common-law approach.
So far, UK policy-makers seem to grasp this. Indeed, many of the recent recommendations around the listing regime and its fintech sector, for example, could have been carried if the UK was still in the EU, and mostly do not go beyond what others are doing. In terms of prudential regulation, the UK may well end up applying stricter standards than the EU — for instance by not allowing investment in software to be counted as core bank capital.
The City of London employs some of the smartest people on the planet. Providing policy-makers continue to maintain the right regulatory environment, innovation will continue — no doubt seeing the emergence of yet undreamt products and markets.
