The process of making Brexit actually happen is daunting, involving millions of pages of rules, regulations, legislative actions and a heavy dose of politics. Getting it right will be difficult and getting it wrong will be easy, though with dire consequences. Nowhere is this conundrum more in evidence than in discussions about the future relationship of the UK financial sector with the EU. The economic stakes are massive as the sector supplies 11% of the government’s annual tax take, generates 9,6% of GDP and a trade surplus of £47 bil. Much of the early Brexit discussions have revolved around passporting, the rights that all EU companies have to sell their products across other EU jurisdictions with relatively little fuss. The financial sector is a big user of passporting and its loss would represent a major challenge for both British firms and those from foreign jurisdictions who have chosen to use the UK as their platform into Europe. Retaining passporting for the financial sector has been a core part of the UK Brexit negotiating position but there is no way to know in advance whether the EU will accept such a demand in the absence of an agreement to accept free movement of labour – and that will not happen.
As more firms have grown to recognise the probable loss of passporting, many have gravitated toward the idea that most things can remain unchanged if the UK is recognised as “equivalent” by the EU. This is simply the idea that if UK rules remain essentially the same as the EU, our firms will be able to operate in EU jurisdictions with little added red tape. Marketing will be more difficult but at least management across borders could continue. This fairy tale notion of how the post-Brexit world might work presents a charming, and re-assuring prospect in which everyone can continue doing most of what they have in the past with little change. Unfortunately, fairy tales rarely come true and this one may be covering up some big disappointments for the future and the reason has little to do with regulation – its politics. And depending on the political climate that surrounds the Brexit process, “equivalence” may be hard to achieve for British firms because equivalence is a gift, not a right. And it is a political gift at that.
The reality is that the UK can keep every single EU Regulation, every single Directive and agree to maintain them in the future but that would not automatically confer equivalence. EU authorities must actively grant equivalence and that will be a political decision. Unfortunately, the EU may choose to apply an approach that is designed to say “non”. And if equivalence is denied, the dynamics of doing business in the EU for British firms will change markedly for the worse, raising costs and complexity in an environment that already has enough pressure on margins. It would not be a happy picture.
There is no question that government level discussions are already taking place and that securing an equivalence agreement is at the heart of those discussions. Firms on both sides of the channel are lobbying hard (and if you’re not, you should be!) but the outcome is unpredictable. A good future plan must therefore be to assume the full application of EU regulations in the UK continues but that full passporting disappears. There will be more UK-only rules over time as well so things like industry-wide SMR will happen around the same time as MiFID II takes effect. For this environment more than ever, firms need tools to provide a control structure and MI that keeps them safe. Better to take those “reasonable steps” sooner than later.
About the Author:
Ronald Gould is European Chairman of ComplySci and is leading the firm’s UK/Europe operations. He is a strategic consultant in the financial services sector with extensive experience in both Europe and Asia. He is also Chairman of Think Alliance Group in Hong Kong, Chairman of OneRe Insurance and the Senior Independent Director of JP Morgan Asia PLC.
Mr. Gould was Senior Advisor at the Financial Services Authority (now the Financial Conduct Authority). Over the years of the global financial crisis at the FSA, Mr. Gould played an important role in the re-structuring of financial institutions and the supervision of complex investment organisations. He is former Chief Executive Officer/founder of ABG Sundal Collier ASA (“ABGSC”), a listed specialist Nordic investment bank with activities in investment research, securities trading, corporate finance and asset management.
Mr. Gould was previously Vice Chairman of Barclays/BZW asset management business, responsible for the group’s extensive international expansion including the acquisition of what became Barclays Global Investors (now Blackrock)
Mr. Gould’s career in the investment business includes research, portfolio management, institutional and mutual fund business development. He was the founder of one of the first international investment groups in the US, one of the first foreign owned Trust Banks in Japan and successful investment management companies in Asia, Japan, the UK and continental Europe.