Financial services, the EU, and Brexit: an uncertain future for the city?
Summary (2 min read)
The UK and the International Financial Market
- The arguments posed in favour of a ‘Leave’ vote often referenced the possibility of lower levels of financial regulation.
- On exit from the EU, the UK’s ability to influence and impose its preferences on these international standards will be severely diminished.
- At present, the UK has four channels through which it can protect its interests in financial regulation.
- As part of the EU’s crisis-era institutional governance settlement and on which all the EU Member States are represented, play a key role in implementing international standards - the European Banking Authority, for example, has been a major institutional player in the design of the detailed technical rules required to implement CRD IV/CRR/Basel III.
- The removal by the US of the costly ‘reconciliation’ requirement imposed on EU firms (to reconcile their financial accounts to US GAAP – the US accounting standard) was agreed because the EU adopted, as a bloc, International Financial Reporting Standards: the US agreed accordingly to accept accounts following International Financial Reporting Standards.
The UK and the Single Market
- On an exit from the EU, the financial services industry will no longer have access to the massive single market in financial services on the basis of current arrangements.
- The passport allows a firm to provide services cross-border and to use branches without being subject to duplicate regulation or supervision.
- The financial crisis led to a political and institutional consensus in the EU on the need for a harmonized single rulebook that would protect the single market against cross-border risk transmission, support pan-EU financial stability, facilitate crossborder market access – and also meet the EU’s G20 commitments with respect to financial regulation reform.
- In addition, much of the single rulebook, with which the UK would have to show equivalence, takes the form of highly detailed technical rules which are proposed by the European Supervisory Authorities.
- Operating outside the EU Treaties and their guarantees, the UK would have little protection against a Financial Union which sought to repatriate certain euro-denominated trading through regulatory means.
The UK and the Domestic Market
- Finally, for those UK firms that do not trade with the EU, an exit from the EU will also generate costs and uncertainties.
- The case was decided on an issue relating to the scope of the ECB’s powers.
- Report by Jean-Claude Juncker, in close cooperation with Donald Tusk, Jeroen Dijsselbloem, Mario Draghi, and Martin Schulz (June 2015).
- During this replacement process, and aside from any consideration of equivalence-related obligations which may arise, the UK will also have to decide which of the obligations it has implemented through Directives it will keep ‘on the books’.
- The unpicking from the macro EU financial regulation order, and in a manner which brings minimum disruption to the financial services sector and its users, of a coherent and stable micro UK financial regulation order - which protects investors and supports financial stability - is a task which confounds the search for a metaphor which illustrates the immense complexity engaged.
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Cites background from "Financial services, the EU, and Bre..."
...In the same week of referendum, many researchers from the field of academics and many journalists tried to analyze the reason which lead to this result and have shown many potential implications on various subjects [4], [7], [15]....
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Related Papers (5)
Frequently Asked Questions (13)
Q2. What are the consequences of the UK leaving the EU?
But the consequences of the extraction of the UK from EU financial governance are likely to be disruptive in nature and long term in duration.
Q3. What was the main reason for the Brexit vote?
News reports in the immediate aftermath of the referendum result included the sharp drop in banking stocks; the overtures being made to attract UK financial business away from the City to other EU centres; and plans by leading financial institutions to move some operations away from the City.
Q4. What is the current status of the UK's right to choose the form in which they access?
At present, the right of UK firms to choose the form in which they access other Member State markets (whether service provision, branches, or subsidiaries) is protected as a matter of EU law.
Q5. What is the role of the EU in the Basel III reforms?
the EU acts as collective bloc on these ISSBs where a common position can be constructed (the Commission typically sits on the ISSBs, whether directly or in an observer capacity) - collective EU interests also shaped the Basel III reforms.
Q6. What was the effect of the new settlement on the relationship between the UK and the EU?
Prior to June 23, there were significant tensions relating to euro area interests and influence, particularly as the euro area can now form a qualified majority voting bloc in the Council and so shape EU/single market decisionmaking more generally, and as Banking Union has created new incentives and opportunities for euro area interests to be pursued.
Q7. Why have international banks and financial institutions established subsidiaries in the UK?
For this reason, international banks and financial institutions have established subsidiaries in the UK so that, as UK home-regulated firms, they can access the single market and avoid the complexities, opacities, and uncertainties of third country access arrangements.
Q8. What does the UK lose on exit from the EU?
On exit from the EU, the UK’s ability to influence and impose its preferences on these international standards will be severely diminished.
Q9. What is the UK’s position on the issue of the euro area?
Notable outcomes include the successful action by the UK against the ECB’s ‘location policy’ for central clearing counterparties – a critical part of financial market infrastructure - which the UK claimed discriminated against non-euro-area central clearing counterparties by requiring euro area location.
Q10. What is the definition of the single rulebook?
This single rulebook is of massive scale and depth, being composed of ‘level 1’ legislative rules, ‘level 2’ technical delegated rules adopted by the Commission, and ‘level 3’ soft guidelines and other measures adopted by the European Supervisory Authorities.
Q11. What is the role of the EU financial regulators in the UK financial sector?
Although in the form of soft law, these measures have become part of the regulatory fabric supporting the UK financial sector and protecting the public interest in stable markets, and have also shaped the business and operating models adopted by financial firms.
Q12. What is the current status of the cap?
To take one example, the famous ‘bankers’ pay bonus cap’, which was fiercely resisted by the UK, is now being reconsidered, particularly with respect to whether new rules governing the proportionality with which the cap applies are required.
Q13. What is the role of the UK in the EU financial regulation negotiations?
And in the interim, it is difficult to see how the UK will be able to exert any form of influence in ongoing Council negotiations on financial regulation – not least as a euro area qualified majority is now in place in the Council and there will be few incentives for euro area Member States to coalesce with the UK: the interests of those Member States with large financial centres - notably France, Germany, the Netherlands, Luxembourg, and Ireland - can be expected to dominate.