Determining how UK financial services interact with the EU following the referendum will be no easy task. One approach might be to look to how banking regulation was originally negotiated, suggests former Association for Financial Markets in Europe director Peter Beales. 

Europe’s interconnected financial markets have experienced a period of uncertainty following the UK’s decision to leave the EU.

Having begun my career at the Bank of England in the 1970s, I have had a ring-side seat as the UK’s financial sector became increasingly interlinked with the rest of Europe, and have helped to develop the rules and regulations that have come to provide the regulatory foundations of the European banking system.

Rightly, concerns are now being raised about how UK financial services will operate when the country leaves the EU. Not only will UK banks be affected, but there are implications for European and global institutions which do business in, and from, the City of London. Given the technical and complex nature of banking regulation, determining the best way forward will be no easy feat. However, there may be lessons from the UK’s time negotiating such legislation that can show the way.  

Interconnected markets

In the early 1970s, we lived in a world where there was no single market access and no freedom from exchange controls. And while then-president of France, Charles de Gaulle, might have objected to the UK joining the European Economic Community in 1963, it came to pass 10 years later when the UK signed up alongside Ireland and Denmark.

Steadily we moved into a more integrated world. First came the 1977 Banking Directive, followed by the Bank Accounts Directive, and the Undertakings for Collective Investment in Transferable Securities, or Ucits, and Consumer Credit directives. These led to major changes in financial services; indeed, the first determined key elements of the UK’s 1979 Banking Act.

Over time, Europe’s markets became interconnected and, eventually, financial institutions operating within the EU were able to offer their services across borders broadly without restriction. The second Banking Directive and those related to it established the passport and common capital standards, to be followed by the Investment Services Directive and others for investment business.

During this period, negotiations took place regarding the intricacies of directives and regulations, often driven by Basel and other international agreements. This established a framework that met the needs of the industry and individual countries. The challenge was increased, however, when enlargement brought greater complexity to the process.

These were huge legislative tasks, but UK policy-makers and industry representatives worked with their counterparts to make them viable and new structures were established to assist the legislation. One such was the influential City Liaison Group. Comprised of leading City law firms and trade associations, it was formed to address challenges from new anti-market abuse measures.

Responding to the challenge

But while the current regulations evolved over time, the challenge now facing UK lawmakers and the wider financial industry is whether the UK and EU can successfully – and amicably – develop a structure for financial legislation that protects customers and does not hinder the ability of either party’s financial services sector to meet their needs.

Passporting is the most pressing issue confronting UK-based banks. The advantages are many, because it allows businesses in one member state to passport services formally to another member state without the need for branch capital.

Can the UK retain this ability? There will be provisions in the upcoming Markets in Financial Instruments Directive measures for third-party regimes to have some access to the single market. However, these are narrow in scope and the UK would need to provide reciprocity and maintain equivalent legislation to EU legislation, over which it has no say.

Of course, these rules developed through a gradual process of negotiation and agreement. What we now face is a far shorter timeframe in which to establish how UK financial services will interconnect with the EU after Brexit.

Given the UK’s historic ability to respond to challenges such as these, continued market disruption could be avoided. We are at the start of a long journey for establishing the best options for access to the EU single market. Whatever happens, UK firms will continue to provide financial services to the EU in some form. The question now is what that form will be.

Peter Beales is a consultant and was previously managing director of policy at the Association for Financial Markets in Europe.

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