Regulatory Relations

In any given year, preparing the UK’s financial services sector for a decoupling from the European Union would have been a monumental task. Throw in a global pandemic and an eleventh-hour trade agreement that made only 90 references to financial services in its 1246 pages, it would be fair to call it a near-impossible task. By Shaun Hurst, technical director, Smarsh 

Discussions are still ongoing between the UK and EU to decide how their respective financial services sectors will continue to operate alongside one another. At the time of writing, progress is reportedly being made towards the signing of a Memorandum of Understanding that will set out “a stable and durable” framework for co-operation. But details so far have been few and far between.

Understandably, many business leaders are demanding more clarity on what they can expect from these discussions. After all, financial services account for more than 10% of the UK’s tax revenues. This is no trivial matter. 

While many of the finer details will remain unclear until an agreement is reached, there are a few hints as to what we can expect to play out over the coming year.

Looser rules?

Many pundits have predicted that Brexit will see the UK’s regulatory landscape return to the ‘Big Bang’ years of the 1980s as the government seeks to provide a competitive advantage for UK businesses. But in truth it is still largely unknown which direction regulation will take in response to Brexit.

What is clear is that the conversation is moving past blanket calls for ‘de-regulation’. Instead, leading City figures are calling on the government to fine-tune existing regulatory standards to support growth and innovation in burgeoning areas such as green finance and fintech. 

Banks should expect the UK’s regulatory system to become more agile and responsive to the ambitions and issues specific to the UK market. Moreover, the UK’s key financial regulators – the Financial Conduct Authority, Prudential Regulation Authority and the Bank of England – will aim to ensure that the UK’s financial market retains its global reputation. 

Far from a looser regulatory landscape, this means that banks will need to ensure that they have systems in place to respond to nuanced regulatory changes quickly and seamlessly.

Catching up with digital 

The disruption caused by Covid-19 pandemic has resulted in the most significant progress in digital transformation in the banking industry for decades. Massive investment in cloud-native IT infrastructure is enabling banks to embrace further innovations in the application of artificial intelligence (AI), machine learning, and collaboration tools. This momentum does not seem to be slackening off at the start of 2021. 

The regulations defining how these technologies can be used in the financial services industry are quickly becoming outdated. This has been one of the key reasons for banks being slow to adopt innovative technology in the past: fear of compliance issues.

As part of the wider ‘levelling up’ agenda, I expect there to be a focus by both the UK government and regulators looking to create a coherent framework that will govern the use of these technologies, so that banks can move forward with technological innovation. 

The regulators know that banks are looking at how disruptive technologies like AI, machine learning and the collaboration tools on which we’ve come to rely can continue to boost their business and support workers as they continue to work remotely.

Following EU regulations 

Regardless of the outcome of the Brexit discussions, UK-based financial services companies will still have to adhere to certain EU regulations.

Cross-border work between the UK and the EU will continue, UK banks will still have customers that are EU citizens, and they will still employ EU citizens domiciled in the UK. This means that financial institutions will still have to adhere to regulatory requirements laid out in General Data Protection Regulation when it relates to an EU citizen. 

When storing and processing EU citizens’ data, or working with teams in the EU, it will now be up to compliance teams to account for regulations in both jurisdictions so that banks can continue to operate. It is imperative that compliance teams are able to manage both the EU and UK regulatory systems.

The future

The exact details of the regulations governing the UK’s financial services sector will remain unclear until the details of any post-Brexit deal on services emerge. What we do know for certain is that banks will be faced with greater complexity as they manage the realities of dealing with two regulatory systems where there used to be one.

Covid-19 has shown us how crucial technology investment is in helping businesses overcome massive disruption. To stay ahead of the compliance challenges they face as the Brexit negotiations continue throughout 2021, banks must invest in technology that enables them to rapidly and seamlessly adapt to a constantly evolving regulatory landscape.