After the shock of last week’s ‘leave’ vote in the European Union referendum and a weekend to reflect on the outcome, financial institutions across the UK are considering big picture scenarios that could result from Brexit and putting together governance frameworks designed to help them manage events as they unfold.
While there is no certainty on exactly when and how the UK will exit the EU, there is certainty that both UK and European financial regulations will endure until negotiations are complete either within or outside the two-year time window provided by Article 50 of the Lisbon Treaty.
Among key EU regulations that are already in place and must be sustained are the Alternative Investment Fund Management Directive (AIFMD), which aims to create a level playing field for the operation of alternative investment funds in Europe, Solvency II, which is designed to promote harmonisation of European insurance regulation, and European Markets Infrastructure Regulation (EMIR). Looking ahead, Markets in Financial Instruments Directive II (MiFID II), which will transform trading and transparency across European financial markets, is scheduled to take effect in January 2018.
While Brexit could ostensibly release UK firms from the requirements of these regulations, the UK will need to put regulation of a similar standard in place if and when arrangements are made to continue trading with EU countries.
Clearly, the long term impact of the decision to leave the EU on the overall UK regulatory framework will depend on the relationship the UK makes with the EU in future. The worst case scenario with the biggest impact will be the withdrawal of UK access to the single market and the end of the financial passport system, making the UK subject to the same rules of trading with the EU as countries such as the US, Canada and Singapore. The only let out here, perhaps, will be to set up a trading vehicle in one of the remaining 27 EU countries as a means to trade in the single market.
Whatever the outcome of Brexit, the cost of regulatory change across UK financial markets will be high, with think-tank JWG recently suggesting it could run to £17 billion over 10 years. Meantime, and despite the years of uncertainty Brexit is likely to cause, financial institutions are working to regain a sense of normality and a return to business as usual.