Global Britain and financial services: Brexit impacts and future prospects:
How will regulatory changes affect the UK financial services sector in the context of the government’s ambitions for a “Global Britain”? In particular, what were the consequences of Brexit, and what are the future perspectives?
Consequences of Brexit
Brexit’s biggest and most direct impact was on trade between the UK and the EU. There is a big difference in the legal environment here before and after Brexit. Before Brexit, there was a real “single market”. Instead, there are some specific commitments to market opening and protection from discrimination (in the UK-EU Trade and Cooperation Agreement) and a framework for the ongoing debate (the Memorandum of Understanding on Cooperation).
Not surprisingly, this has had a significant effect on how business can be conducted between the UK and the EU.
In the new world, UK companies wishing to conduct business from an EU Member State generally need to be licensed by the host country and therefore must operate under the rules and supervision of the host country. The reverse is the same, although EU companies have been temporarily spared the need to go through a full UK authorization and approval process under the UK temporary authorization system.
Cross-border activities (ie activities conducted directly in the Host State rather than from a place of establishment in the Host State) were also limited. Cross-border activities from the UK to the EU are banned by some Member States, at least for some types of business.
Prospects for this change in the medium term are slim: recognition of ‘equivalence’, which some have cited as the solution, will not be given to UK companies for the time being, at least for the time being. But equality would never be a panacea anyway. Coverage is irregular (does not exist for retail, nor for normal insurers and banks) and is a precarious basis for building a business model, as recognition of equivalence can be revoked in the short term.
Cross-border business is generally easier from the EU to the UK. Not so much because of the UK equivalency decisions (although these are broader than those in the EU), but because of the “exclusion of persons abroad” that may be available to all foreign companies, including those in the EU.
Changes were also made to the infrastructure. The UK still allows EU companies to use UK trading platforms and clearing houses in the same way as before, but the reverse is not true. EU restrictions on the use of trading platforms in the UK have resulted in the transfer of a significant part of the UK’s EU share trades to the EU. The dust has yet to settle on clearinghouses: the EU has yet to say whether it will ban EU companies from clearing derivatives at the UK clearing houses once a recognition of temporary equivalency expires.
The UK government seized two opportunities presented by Brexit: the UK’s newly acquired freedom to negotiate its trade agreements across the world, now that it is no longer subject to the EU’s common trade policy; and the ability to adapt its regulatory system to its needs, free from the restrictions of EU internal market rules. The hope is to negotiate better access to foreign markets and attract liquidity and resources to the UK.
However, recent precedents suggest that the ability to significantly open foreign markets for financial services through trade agreements is limited. Financial services chapters, even the most recent ones, rarely go far beyond the repetition of commitments already made in the WTO General Agreement on Trade in Services.
They typically provide protections (or, more commonly, block existing safeguards) against discrimination, both against suppliers in other countries and against suppliers in the host country, but do not grant positive access rights or provide an alternative to authorizing host country requirements.
These restrictions are no coincidence: in addition to the usual distrust of exposing domestic players to foreign competition, there are also concerns about consumer protection, and the global financial crisis has shown how foreign financial institutions can pose a threat to a country’s financial stability.