How Financial Regulation is Shifting After Brexit
With the UK now out of the EU, the drive towards equivalence is giving way in favour of regulatory divergence. What will this mean for the UK financial sector?
While the EU is pushing towards harmonisation of regulations around the world, the UK sees Brexit as a chance to restore power and give more discretion to their own regulators. This, it is believed, is an opportunity to give UK institutions and markets an edge over their global competitors.
Different approaches
The Lords Committee reviewing the future of EU/UK relations suggests greater leeway for UK firms to write technical policy and to police their own users’ products. There is a greater emphasis on self-regulatory organisations in the UK, rather than the EU approach of relying on the regulator.
The UK has been looking at changes across the board including equity, commodities and fixed income markets, including amending the scrapping of caps on trading in dark pools in which traders can privately make trades without signalling their intentions to the wider market.
Another example is the UK’s decision not to extend the application of the Securities Financing Transactions Regulation (SFTR) to non-financial companies, contrary to the rules that recently came into force in the EU. Furthermore, the UK decided not to implement the EU Central Securities Depositories Regulation’s (CSDR) settlement discipline regime either.
EU freedom to choose
The EU is seemingly also using Brexit as an opportunity to adapt their regulatory framework to their own liking. Even before Brexit, the UK was seen as something of an outlier. Regulatory policy was usually a balancing act between the German, French and UK approach. With the UK out of the picture now, the EU has the freedom to go its own way and emphasise their preferred bank-based approach to regulation.
Which side has the right approach?
For those in the UK, this is a chance to give Britain more flexibility when it comes to regulation, but it could also reduce the ability of governments to scrutinise the work of financial regulators and ensure they are fit for purpose.
Unsurprisingly, this also has an impact on hopes for the UK and EU finding some common ground on rules surrounding equivalence. The EU will decide on what access financial institutions can have to their markets depending on whether their regulatory environment is of equivalence to the EU’s and does not provide a competitive advantage.
The problem is the urge to seek greater divergence and to identify Brexit dividends is inevitably incompatible with the principle of equivalence. So far, the EU has granted only two temporary permissions and the climate of discussions between the two sides does not bode well.
Increasingly, the rhetoric coming from the UK views equivalence as having diminishing importance compared to the ability to set their own rules. The House of Lords European Union Committee said that while equivalence remains desirable, its benefits are subject to limitations. It questions whether equivalence would be worth the loss of rulemaking that such a decision would require.
There are areas in which the UK and EU will continue to cooperate closely on areas such as changes to MiFiD II. Both sides will also emulate certain regulations from the other. However, as the trend switches towards regulatory divergence, hopes of permanent deals on equivalence are fading.
Businesses will need to adapt to a regulatory landscape in which divergence will be the overriding theme. After years in which global regulators have sought to increase cooperation, the UK now sees divergence as an opportunity. The long-term implications may be unclear, but in the short term, those companies doing business in both the UK and EU will have to balance how they comply with differing regulations.
