Leaving the EU poses problems and opportunities for banks under the UK’s new regulation framework.
The UK government set out its blueprint for post-Brexit financial services last month.
The UK Financial Services Bill outlines the country’s post-EU regulatory regime and it is expected to receive ratification from parliament before the UK leaves the single market at the end of December.
The bill seeks to promote financial stability by implementing the remainder of Basel III and a new prudential regime for investment firms.
The UK’s Financial Conduct Authority (FCA) is to be given more powers to oversee the orderly transition away from the London Interbank Offered Rate (Libor) to alternative interest rate benchmarks.
There is an extension on the recognition of third-country benchmarks from the end of 2022 to the end of 2025, giving administrators more time to make them compliant, a move designed to maintain financial stability and avoid investment disruptions.
There is an also update to the Markets in Financial Instruments Directive regulation (MiFID) – the part that regulates the services and activities of third-country firms in the UK – which will give the FCA more oversight powers.
The bill looks to complete the implementation of the European Market Infrastructure Regulation on regulatory fitness and performance. The measure ensures that clearing houses can operate in a fair, reasonable, non-discriminatory and transparent basis. This measure will also improve trade repository data quality and make it easier for firms to move from one trade repository to another.
Issues of equivalence
Leaving the EU poses problems and opportunities for banks under the UK’s new regulation framework, said Peter Bevan, head financial regulation at Linklaters law firm.
“For many years, the UK has relied on EU policy-making and now it needs its own way. Moreover, as the UK leaves the EU it inherits a tangled mess of regulations which means there’s no single source of rules for firms to look at,” Mr Bevan said.
Any bank looking at the tangled mess of regulation is left with an enormous challenge working out what is changing... and what it will mean for their business
The bill seeks to transfer more responsibility to regulators such as the FCA and the Prudential Regulation Authority (PRA). To balance this shift, parliament and the Treasury are setting into law parameters for how those powers are used as well as deciding which activities require regulation.
“Any bank looking at the tangled mess of regulation is left with an enormous challenge working out what is changing – and what it will mean for their business,” Mr Bevan said.
Regulatory pressure points
On November 9, chancellor Rishi Sunak outlined a series of plans to parliament with a focus on green finance and digital currencies. The UK government plans to launch the UK's first green government bonds next year.
Areas of ongoing regulatory change include green finance and the development of fintech in the UK. “A number of emerging technologies do not fit very well into existing regulatory frameworks,” Mr Bevan said.
In his speech to parliament, Mr Sunak said he would grant a package of equivalence decisions, across a range of financial activities to the EU and member states of the European Economic Area, regardless of what the bloc eventually decides.
The question of equivalence is likely to be at the forefront of many banks’ concerns, Mr Bevan said. “[Banks] will want to continue accessing European markets from the UK as much as possible and hope there will not be changes in the UK which might jeopardise those equivalence decisions.
“The UK will want to make regulatory changes, which suit its distinctive market, but it will nevertheless not want to make its rules too different from other jurisdictions, which would create a barrier to doing business in the UK,” he said.
“Another issue of concern for banks will be the implementation of the latest round of the Basel rules for banks. In addition there are provisions in the bill, which are aimed at the overseas investment funding market, and distributing those products in the UK,” Mr Bevan said.
“How to tackle these issues is of considerable interest to banks. The government has fired the starting gun on what will be a very busy period.”
