During the negotiation of the exit process financial services law and regulation has been one of the less prominent issues on the UK and EU Brexit agenda. Deborah Deane argues in this blog that in the next ten years it is likely that the EU and the UK will increasingly diverge both in policy and in regulation, at least in detail, if not in substance, as they find themselves competing with each other to meet the challenges of maintaining a vibrant and sustainable financial system in a changing economic and political world.
Written by Deborah Deane, PhD Candidate at Victoria University, Wellington, New Zealand.
This blog is part of a policy report called "NEXTEUK – EU and UK Relations: Where will we be in 2031?".
During the negotiation of the exit process financial services law and regulation has been one of the less prominent issues on the UK and EU Brexit agenda. Goods, fisheries and the Irish border became the hot topics and the vital role of the financial markets was largely ignored. In the next ten years it is likely that the EU and the UK will increasingly diverge both in policy and in regulation, at least in detail, if not in substance, as they find themselves competing with each other to meet the challenges of maintaining a vibrant and sustainable financial system in a changing economic and political world.
At the start of the Brexit process, the idea of equivalence being a means of keeping UK and EU law and regulation in alignment and replicating the benefits of the Single Market was considered crucial but as time has gone on it has been shown to be unworkable, both politically and economically, and it is now possible to declare equivalence and its sister, mutual recognition, dead. This contribution will explore what will drive financial services in the next decade and how we will see the UK and EU developing in the post-Brexit post-COVID-19 post-Ukraine environment.
Politically, both the UK Government and the EU see themselves in a strong position internationally and domestically. The UK Government has stated that Brexit is a once in a lifetime opportunity to “set out a bold new UK regulatory framework based on a set of principles embedded in UK common law, which prioritises innovation, growth and inward investment as part of the UK’s new global trading freedom, building on the UK’s global reputation for leadership in setting the highest standards of environmental and consumer protection.” (UK Cabinet Office, 2021). The EU also sees Brexit as an opportunity to develop stronger political ties within the Union and making the Union work as a genuine financial union through the Capital Markets Union and Banking Union but it still has fundamental strains on the Union which the UK departure will not necessarily cure. If the EU can address the concerns of the minority and complete the Economic and Monetary Union, it may be able to deliver on the promise of prosperity which it has made to its citizens (European Commission, 2017).
Economically, the COVID-19 pandemic has had devastating effects on local, national and international economies as well as the social fabric of both the EU and the UK and we are only now just beginning to see how those may play out. If the public health issues can be resolved through global vaccination programmes, the economic consequences of COVID-19 may be less long lasting but the impact of the various UK and EU recovery programmes such as the EU’s NextGenerationEU (European Commission, 2021) will be inter-generational and will shape the economy for many years ahead. The impact on the economy of the Russian/Ukraine war and the wider effect of sanctions will also have long term costs which are impossible to calculate at this point.
Aligned with the opportunity for the UK and the EU to develop their own agendas in financial services is the role technology will play in promoting innovation in the financial sector. Since the Global Financial Crisis of 2008/2009, the banking, payments and financial markets have seen huge step changes in speed, effectively and competition. In another ten years, the delivery of financial services may be unrecognisable to us today as technology promotes greater financial competition and the development of new markets and products and delivery mechanisms.
Both the UK and the EU see post-Brexit as an opportunity to remove regulation as unnecessary barriers to growth. The UK has already flagged its intention to move away from the more technocratic approaches (HM Treasury, 2020)[1] which the EU as a consultative entity must necessarily have more attention to and to adopt “better” regulation by adopting international standards by being more proportionate, more forward-looking and more outcomes focussed. The UK is currently considering how that future will look (HM Treasury, 2021) and has stated its intent to amend, replace, or repeal all the retained EU law that is not right for the UK (HM Government, 2022). While a member of the EU, the UK was required to abide by EU law and to ensure continuity and certainty immediately after Brexit, the UK transferred this EU legislation and EU case law and principles into UK law as retained EU law, through the European Union (Withdrawal) Act 2018. Having “taken back control” of these rules and regulations, the UK Government has stated it will review retained EU law to meet the UK’s priorities and allow changes to be made to retained EU law more easily (HM Government, 2022).
There is, however, a range of “unknown unknowns” which could impact the development of financial services in both the EU and the UK over the next ten years – not the least of which is the developing situation on the borders of EU in Ukraine. The success of Economic and Monetary Union relies on the EU surviving the stresses and strains arising from the economic impact of migration (including the flight of refugees from the Ukraine) and the tensions of closer political and economic ties within the EU (European Commission, 2021). The UK too has its own unknowns about the union of the United Kingdom itself and whether in the post-Brexit post-COVID-19 environment the pressures will irrevocably change the constitutional nature of the UK.
Finally, one can also never discount the effects of a major, even catastrophic economic downturn possibly spurred on by an oil and energy crisis aligned with concerns about the global drive toward increased sustainability and net-zero and the impact this will have on the increasingly connected global economy. It is likely, however, that somehow the UK and the EU will still be here in 2031, perhaps not as we know them now but that financial services will still be at the heart of a better future for the UK and the EU and their respective citizens.
[1] The UK has already announced its intention to alter certain prudential standards to align with Basel III principles, make changes to the benchmarks regulation, review regulation under the MiFID framework, revisit the issue of the marketing of overseas funds in the UK and elsewhere as well as changes to anti-money laundering, market abuse and insider dealing legislation.
References
European Commission, Reflection Paper on the Deepening of the Economic and Monetary Union, 31 May 2017. Available from https://ec.europa.eu/info/publications/reflection-paper-deepening-economic-and-monetary-union_en[Accessed 30 August 2021].
European Commission, COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE COUNCIL, THE EUROPEAN CENTRAL BANK, THE EUROPEAN ECONOMIC AND SOCIAL COMMITTEE AND THE COMMITTEE OF THE REGIONS, The European economic and financial system: fostering openness, strength and resilience, 19.1.2021 COM (2021) 32 final. Available from https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52021DC0032&qid=1611728656387[Accessed 30 August 2021].
European Commission, The EU’s 2021-2027 long term budget and NextGenerationEU – Facts and Figures, April 2021. Available from https://op.europa.eu/en/publication-detail/-/publication/d3e77637-a963-11eb-9585-01aa75ed71a1/language-en[Accessed 30 August 2021].
European Commission, Reflection Paper on the Deepening of the Economic and Monetary Union, 31 May 2017. Available from https://ec.europa.eu/info/publications/reflection-paper-deepening-economic-and-monetary-union_en [Accessed 30 August 2021].
HM Government, The Benefits of Brexit: How the UK is taking advantage of leaving the EU, 4 January 2022. Available from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1054643/benefits-of-brexit.pdf [Accessed 21 March 2022].
HM Treasury, Financial Services Future Regulatory Framework Review, Phase II Consultation, October 2020. Available from https://www.gov.uk/government/consultations/future-regulatory-framework-frf-review-consultation [Accessed 30 August 2021].
HM Treasury, A new chapter for financial services, July 2021. Available from https://www.gov.uk/government/publications/a-new-chapter-for-financial-services[Accessed 30 August 2021].
UK Cabinet Office, Taskforce on Innovation, Growth and Regulatory Report – final report, May 2021. Available from https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/994125/FINAL_TIGRR_REPORT__1_.pdf[Accessed 30 August 2021].
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