Some panelists at the Misys Connect Forum in London yesterday argued that leaving the European Union will be positive for the City of London as the UK will have the chance to reshape financial services regulation to fit its needs.
Patrick Minford, professor of Applied Economics at Cardiff University, said the UK government is likely to choose a “hard Brexit” and leave the EU customs union and the single market as the referendum result means that free movement of people from the EU to the UK will be unacceptable. This means that financial services firms in the UK would lose the ability to use a passport to sell services across the EU using am authorisation just from the UK regulator. However Minford argued it would be a huge advantage to bring back regulation from the EU.
“A major drop in protectionism will lead to a big expansion for The City,” added Minford. “Growth will be 10% for the next couple of decades.”
He claimed that any new rules on migration would make it difficult for unskilled workers to come to the UK but not affect skilled workers. In addition Minford said the EU would easily grant UK financial services equivalence, meaning that UK regulation is the same standard as EU regulation, and so The City could still sell services to the EU.
However John Barrass, deputy chief executive of the Wealth Management Association, disagreed as he said that the UK should not expect any regulatory dividend at all from leaving the UK.
“Between one half and three-quarters of EU regulation is written by UK regulators at the Financial Conduct Authority,” Barrass added. “Those who expect light touch regulation from the UK have another thing coming.”
In addition UK customers of wealth management firms will want to retain access to funds from Luxembourg, Dublin and the Channel Islands.
Barney Reynolds, partner, head of the Global Financial Institutions Advisory & Financial Regulatory Group and global co-head of Financial Institutions at law firm Shearman & Sterling, said it is unrealistic for The City to expect passporting to continue as the UK will not accept having to continue to apply EU rules.
“The City needs a reset,” he said. “Third party equivalence under MIFID II applies to all of a bank’s investment business.”
Under MIFID II, the rules covering EU financial markets from 2018, countries outside the EU can provide services to the trading bloc provided European regulators accept that their rules are of an equivalent standard to the EU, even if they are not the same.
Reynolds believe that the most likely option after Brexit is that the EU will allow equivalence in other EU regulation regimes outside MiFID II.
He said the UK should seize the opportunity to get rid of EU laws that are not needed by the City such as double-sided traded reporting or having to report futures to trade repositories when they already go through a central clearing house.
“As long as the UK does not touch systematic risk regulations we can rethink the rest,” added Reynolds. “We should think out of the box as what we have is not good.”
Angela Knight, chair of tax simplification at HM Treasury, said the UK government will not want to recreate being part of the single market after Brexit as that is not what public voted for and, in addition, there is little sympathy for financial services. She said: “The financial services industry has to decide what it wants and make a business plan.”
A poll of the audience at the Misys forum found that 26% believe Brexit will be positive for The City while 35% believe it will be negative. In addition 28% said it is too early to tell.
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