Regulatory Relations

Contrary to what some EU policy makers believe, the UK is not about to engage in a regulatory race to the bottom post-Brexit. It simply wouldn’t make sense, would violate global agreements and actually damage the City of London. By Justin Pugsley

There is a deep suspicion in Brussels that the UK is itching to gut its regulatory regime after it leaves the EU, but this view is misguided for several reasons.

Philip Hammond, the chancellor of the exchequer (finance minister), is partly to blame for that view. In 2017, he threatened that the UK would slash taxes and regulation if it did not get an all encompassing trade deal with the EU post-Brexit.

It is worth noting that he has since back-peddled on that threat and now talks about keeping the UK closely aligned with the EU.

It is unlikely the UK would rip up its regulatory framework even in the event of a no deal scenario, but it may diverge from the EU more than it otherwise would under such circumstances.

The world’s attitude towards financial regulation has changed markedly since the 2007-9 global financial crisis. Not only does the public demand stricter regulation, but so do investors. For example, many asset managers welcome G20 agreed clearing mechanisms for over-the-counter derivatives. They also prefer to invest in and transact with properly managed banks.

Indeed, if lax rules were so great then why don’t certain countries in central America, which routinely feature in money laundering and tax evasion scandals, host the world’s largest financial centres? It is partly because institutional capital fears the reputational risks.

This is why Singapore has worked hard to tackle money laundering and Hong Kong has clamped down on market misconduct. Both pursue robust prudential regulatory standards and do not want flaky banks undermining their economies and reputations.

Legitimate financial firms and investors want strong protections, transparency, fairness and rule of law, which the City of London must continue to offer if it is to thrive post-Brexit. UK regulators get that.

Besides, post-crisis the UK was a major voice pushing for tougher rules at an EU and global level. It supports the Financial Stability Board, The Basel Committee on Banking Supervision and The International Organisation of Securities Commissions, whose guidelines underpin the global financial system.

Outdoing the EU

The UK also gold plates EU rules and sometimes goes further. Two specific cases are the senior managers and certification regime and insisting from 2019 that banks ring-fence their investment banking units from their retail businesses. Both are onerous and UK-specific.

Although the UK must not loosen its rules, and remain closely aligned with globally agreed standards, it should make its post-Brexit regulatory regime easier to comply with and focus more on outcomes rather than box ticking.

The problem with EU rules is they involve compromising among 28 member states, often producing unwieldy texts. They tend to be overly prescriptive, because the European Commission does not trust all member states with implementation. All this often makes compliance harder than it needs to be.

The markets in financial instruments directive is a good example with its blanket focus across asset classes rather than separate regulatory regimes. It has resulted in patchy compliance, confusion and difficulties with drafting level 2 texts. Many compliance professionals think it could have achieved the same objectives in a simpler way.

The US and EU can get away with unwieldy rules due to their economic size. For an independent UK that will not be so easy and its regulators need to remain nimble and responsive. That means not being tied to EU rulemaking post-Brexit over which it will have no influence.

UK regulators must always be able to quickly respond to opportunities and threats posed by developments such as the rapidly growing fintech sector.  Also, with around 90% of global growth forecast to occur outside the EU over the next decade, the City of London should be positioned to fully participate and have the necessary regulatory structures to do that.

The UK should compete post-Brexit, not with reckless deregulation, but with tough, fair and proportionate rules based on evidence and common sense and drafted so firms clearly understand what is expected of them.