Brexit and Regulations - Tough just got tougher 

Brexit and RegulationBy Silvano Stagni – Global Head of Research, Hatstand (A Synechron Company)

Last Friday, the City of London woke up to the fact that 51.9% of British voters want out. But what does ‘out’ actually mean for banking regulations? Let’s take one step back and try to look at things with a cool head.

The UK signed up to the international commitments that generated some of the provisions of MiFID II and EMIR as part of the G20 group of countries. The UK will have to come up with its own version of the Principle of Financial Market Infrastructure Regulation - the document published by the Bank of International Settlement. This was the starting point of the processes that generated Title VII of the Dodd-Frank Act, EMIR and the post-trade reporting and clearing rules that are now effective around the world. For instance, the obligation to trade liquid instruments on exchange with greater transparency is a commitment from the famous G20 meeting in Pittsburgh in 2007 - post-Lehman crisis. The UK was a signatory as ‘United Kingdom’ and not as a member of the EU. Moreover, the FCA worked at what we have now - I doubt they will do anything different in a short time.

Whatever the ‘out’ will look like (as discussed in the next point), it will happen after January 3rd, 2018. So MiFID II will happen, the changes to reporting to repositories under EMIR will happen (Spring 2017), the progressive entrance into effect of rules for Central Clearing asset class by asset class will happen, the Securities Financing Transaction Regulation will happen and MAR is already happening. The FCA has played an active role in shaping those regulations and will continue playing it until the UK leaves.

How many ways do we have to shape the ‘out’? Technically there is a way for the UK to stay in the Single Market for Financial Services and keep the current passport regime (and its forthcoming evolution).

  1. The UK could re-join the European Free Trade Association (EFTA) and apply to re-join the European Economic Area (EEA). The Single Market in Financial Service covers the EU and the EEA (currently Norway, Iceland, Liechtenstein and Andorra). This will mean that nothing changes.
  2. The UK could re-join EFTA and stay out of the EEA and negotiate a bilateral agreement, like Switzerland. In this case, they would have to come up with similar regulations. There is a possibility that only the name will change rather than the substance.

All of this will depend on negotiations. Parliament will have to invoke Article 50 of the Maastricht treaty and start negotiations to leave. The deadline should be two years which will take us past the deadline for most of the regulations mentioned above. The only precedent is Greenland. They joined when Denmark joined and asked to leave a few years later. Now, the Greenland economy cannot be compared with the UK and also the UK has over forty years of joined rules and regulations to untangle. Well, it took the Inuit three years to leave. How long will it take the UK? The shape the ‘out’ will take will undoubtedly be the subject of many conversations in months to come. Whatever happens, it really looks as if the regulations are here to stay. So... the more things change the more they stay the same, but… not quite yet and not in the next twenty-four months.