The first thing is to say that nothing will happen immediately as there will be a minimum of two years of negotiation before withdrawal occurs.
In the meantime, the UK’s financial services regulation will continue to operate within the framework set by the European regulatory bodies.
To attempt to understand the longer-term implications of Brexit, it is helpful to explore the meaning of the EU Single Market.
The Single Market seeks to guarantee the free movement of goods, capital, services and people between the EU’s 28 member states. This means that a company operating in the UK that meets UK regulatory standards (which are harmonized across the EU) can do business, whether providing services or goods, anywhere in the EU with no tariffs or restrictions.
The flip side to this is that each country in the Single Market has to adopt the same rules and regulations.
This is the case for the financial services industry, which is one of the areas where the 28 members of the EU have largely given up their own power to make their own rules, handing significant control over to central European bodies.
Impact of Brexit on financial services
On the face of it, leaving the EU means leaving the Single Market.
Outside of the Single Market, the UK would then be free to model its own financial services regulation. However, it would also mean that UK financial service firms located in the UK may no longer be able to provide services and products to businesses and people in the EU without restriction.
This will also have an impact on American, Japanese and other non-EU international banks, with offices in the UK. Currently by virtue of having a subsidiary in the UK, non-EU banks have passport rights to trade in the EU.
This will no longer be the case if the UK is outside of the Single Market.
Because of this issue, some large international banks indicated earlier this year that they may move part of their operations from London to financial centers in the EU in the event of Brexit.
Can UK leave the EU and stay in the Single Market?
Concerns over this matter have caused some to consider whether the UK could leave the EU but stay in the Single Market. Countries that are often
cited in this context are Norway and Switzerland.
Both of these countries are outside the EU but have some access to the Single Market.
Norway accesses the whole Single Market via membership of the European Economic Area (EEA); Switzerland accesses a portion of the Market through a range of bilateral trade deals with the EU.
The problem with both models is that the EU has insisted, in return for access to the Single Market, that these countries accept the free movement of people from the EU.
In the UK this is unlikely to be politically acceptable as concern about immigration was one of the key drivers behind the vote to leave.
So where does that leave the UK?
It is important to note that there is no precedent or blueprint for leaving the EU. The outlook is fundamentally uncertain.
If the UK refuses the free movement of people to and from member states, it will most likely have to leave the Single Market as well as the EU. This, in turn, may lead to some movement of some international banks’ operations from London to Europe.
Over the next year, there will inevitably be some paralysis in the UK financial services industry as leave negotiations are conducted. The lack of regulatory certainty will be unhelpful to strategic business decision-making.
In the longer term, the UK will be free to set its own financial services regulation. Time will tell whether the UK chooses to compete with Europe by remodeling to a more bank-friendly environment, perhaps also pulling back from aggressive enforcement action, or whether it chooses to stay in harmony with European regulations, maximizing its chances of free trade with the remaining 27 members of the EU. But those will be options in play.
Clutch Group will be monitoring the developments throughout the EU and UK pertaining to the Brexit process and the effects on the Financial Industry, economy and government. Check back daily for updates.
Charles Hastie is Regulatory Head at Clutch Group, working out of the company’s London office. Charles harnesses his long-standing regulatory investigation experience to develop strategic solutions for Clutch’s financial services clients. He establishes ongoing liaisons with key opinion leaders, government officials, and regulatory bodies to ensure that significant developments in the field are monitored and relayed to clients. For more information, contact Charles at [email protected]