The City has entered Brexit purgatory, an unpleasant holding period in which the financial services sector doesn’t really know where it stands with its European counterparts. We know that passporting has been revoked, but the possibility of equivalence deals remains. The FCA no longer has to abide by the EU’s directives, offering unprecedented room for manoeuvre but has yet to really show its hand.
On the face of it, there are reasons to be optimistic that the UK will seize the opportunity to diverge from EU regulatory standards to create a regime that makes more sense for London than it did for the Continent. Almost a year ago, the Financial Conduct Authority installed Nikhil Rathi as its new chief executive. Rathi has deep experience in the political sphere, having worked at the Treasury himself. Meanwhile, Katharine Braddick — the Treasury official given the unenviable task of negotiating a post-Brexit deal for financial services — is herself a veteran of the Financial Services Authority as it was then, as well as the Prudential Regulation Authority, and has industry experience from her time at the Association of British Insurers.
At a formal level, sources say their relationship is a good one. If there were two people who could work together to execute the government’s vision of a resurgent City freed from Brussels’s reins, then, surely it would be them?
There is quite a lot at stake, not least proper recognition of the very distinct way the UK’s asset management sector operates, as industry leaders continue to lobby for an end to EU rules governing disclosure, among other pet peeves they have long held with European directives.
However, the chances are that they will not see much movement. The UK is unlikely to diverge from EU financial services regulation for a host of reasons.
All the way back in June 2019, Rishi Sunak revealed that the government would be reviewing the future of the UK’s post-EU financial services regulatory framework. Having taken a look at how the authorities that oversee the financial services sector interact in the first part of its consultation, it is now onto the second phase of that work, which is examining the broader regulatory framework for UK financial services.
That’s where the meaty stuff will happen, you would be tempted to think. Yes, the government does concede that retaining a mix of domestic and EU rules post-Brexit will lead to a jumbled rulebook. But remember the review starts with the premise that, broadly speaking, the UK’s existing ground rules of regulation under the Financial Services and Markets Act are still appropriate.
Rather than proposing a clear plan for breaking with Brussels, the Treasury’s proposals going forward mainly relate to who is responsible for what, now the EU is out of the picture, and where existing regulations should now sit in our own axis of authorities.
The second reason to believe divergence from EU rules will be scant is that a lot of what insiders want stripped back from the EU rulebook is technical, for example, transaction cost reporting in the Priips directive.
The practicalities of the politics involved mean Westminster is hardly going to join in this fight with any vigour. As a senior public policy source says, “imagine a British MP getting stuck in on what K factor should be for an investment firm”, and you get a picture of why such calls haven’t resonated yet. For its part, the FCA has been very clear that its role is not public policy; it is regulation. Its only statutory remits are protecting consumers, ensuring market integrity, and promoting effective competition. If it’s going to go through the effort of changing something, the regulator will need to be convinced it will have a genuine, material impact on one or all of the above.
As the FCA seems increasingly focused on moving towards becoming an outcomes-based regulator, rather than one that polices the minutiae of every subsection of its handbook, it makes it even less likely it will change course on what could be seen as trivial technicalities by anyone not at the coalface of the issue.
That discussion of what today’s FCA looks like throws up another strong reason why it might not acquiesce to calls to diverge from the EU by slashing its rulebook. While the Treasury wants to bat for global Britain, for London to be a financial powerhouse recognised the world over despite our acrimonious departure from our EU colleagues by reducing red tape, consider the position the FCA is currently in. It has recently gained a reputation as a regulator that shuts the stable door long after the horse has bolted.
Commentators ask why it did not act sooner over collapses of mini-bond firms like London Capital and Finance and Blackmore, why defined benefit pension transfer misselling was allowed to go on so long, and why it has still not done anything to bring justice for investors trapped in Neil Woodford’s collapsed fund empire some two years on from its demise. If it wanted to defend the semblance of respect it has left as a robust enforcer, the last thing the FCA would want to be seen doing now is to give the financial services sector an easier ride because of Brexit. Slashing the rulebook would simply lead to further accusations that it is too soft on the City. The Treasury may want to make bold strides forward, but that does not necessarily mean the FCA will want to throw caution to the wind alongside it.
Despite its expansion in recent years, the FCA also remains incredibly resourced stretched. The watchdog has already had to delay various projects because of Covid-19, and, in the wake of the referendum, estimated that Brexit would cost it an additional £30m in 2019 alone. Wielding the axe to regulation still takes resources and manpower as much as creating new rules does. For firms themselves, having already spent time and money adapting to new dictates, they would also face a burden if they had to completely reform their business models once more.
But the principal reason we will not see much divergence is that what the FCA wants and what the EU wants are still relatively similar.
While the FCA is consulting on a “long‑term asset fund”, the EU is discussing the prospects for a “long-term investment fund”. Parallel consultations are ongoing on Mifid II and capital markets regimes. Solvency II requirements for insurers look remarkably similar to domestic regulations, and a ripe target for an equivalence deal according to market watchers.
As one senior public policy source puts it “we are not going to diverge soon simply because we have got the same issues”.
That’s not to say that the UK won’t start to move in a slightly different direction from the EU at some stage. Eventually, the UK’s predilection for common law over the EU’s tradition of writing things down in statute will come out in the wash. Others have predicted that we may indeed see movement on capital markets given that review appears to be very much Treasury driven. The PRA might take a different approach from the FCA when it comes to its Solvency II remit.
But with all of the above in mind, it is hard not to agree with those that think major change will remain elusive.
To contact the author of this story with feedback or news, email Justin Cash