The post-Brexit financial regulatory landscape takes shape

By Gareth Jones

It is now over four months since the UK left the single market and customs union and UK financial services lost its pre-Brexit access to EU markets. The impact of this has certainly been felt in parts of the City (see here), although other areas appear more focused on other market issues, such as the post-Covid recovery. 

Some in the sector had hoped that future market access would be improved through an equivalence deal with the EU, although in reality the Memorandum of Understanding signed in March offered little in terms of substance and is unlikely to signal any breakthrough deals in any of the key services (e.g. banking, payments, investment services, fund management, clearing, insurance) in the immediate future. The ongoing focus for UK policymakers, therefore, is to ensure that the City maintains its competitive position as a global centre of finance by (a) building closer links with financial centres outside of Europe (e.g. in Asia and the Middle East) and (b) focus on shaping a regulatory environment which encourages new and emerging areas of finance.

The recent speech, by the CEO of the FCA, Nikhil Rathi, was early indication of how policymakers and regulators would pursue this approach. Delivering his speech at the Association of Foreign Banks on ‘the UK Regulatory Landscape Post-Brexit and Beyond’, much of Rathi’s speech was focused on the role that international firms play in UK financial markets.

While some had feared (or hoped) that the UK would adopt a deregulatory approach (or ‘light touch’ regulation) to markets to attract more overseas investment, Mr Rathi stressed that the FCA’s regulation of overseas firms is aimed at achieving the same high standards as domestic UK firms, and ensure a level playing field. For EU firms currently accessing UK markets, the Temporary Permissions Regime (TPR) will move to a more permanent arrangement and there will be a rigorous review of all firms seeking to enter the UK authorisation gateway. Importantly, Rathi noted that overseas firms should expect a tougher and much more effective gateway for new firms entering markets, with closer scrutiny of what those firms do post-entry. He added that further detail on next steps will be available in July when the FCA publishes its Business Plan.

On specific areas of regulation, Rathi said that the UK will have more regulatory flexibility post-Brexit and will “use this for the benefit of UK financial markets and consumers”. The areas where this flexibility could be applied have already been indicated and they include:

• MiFID rules on research and best execution reporting: MiFID rules on research have long been seen as a burden on investment firms. The FCA have opened a consultation on whether research on small-and medium-sized companies will no longer be subject to the “inducement” rules.
• Lord Hill’s review on listings: An independent review by Lord Hill was published in March, outlining a number of proposals to encourage more firms to list in the UK. The recommendations are currently being considered by government.
• The Kalifa review of UK Fintech: Another independent review, this by Ron Kalifa, on measures to position the UK as a leader in fintech. Key proposed measures include a regulatory ‘scale box’ (an extension of the fintech sandbox programme), which allows fintech companies to test out new ideas and business models that are not fully covered by existing regulations.
• The ongoing review of the UK’s Future Regulatory Framework (FRF): A broad and high-level review of on how financial services policy and regulation are made in the UK. This review could lead to more profound changes in the long term.

Rathi stressed that the UK will not diverge from EU regulations “for the sake of it”, but the FCA would not “target equivalence at any cost” – acknowledging the dangers of letting the UK become a rule-taker of the EU, but also wary of negative consequences of too much divergence (e.g. erecting further barriers to market access and restricting competition and choice for UK consumers – or lowering the standards of regulation too much). Regulators will be wary of attempts by some in the financial services industry to use Brexit as a reason to unravel many of the post-crisis regulatory reforms, which were largely put in place to ensure greater financial stability and consumer protections (for example, some banks are now pressuring the PRA and FCA to drop ring-fencing rules, which were only implemented two years ago).

Fundamentally, a post-Brexit regulatory regime will need to be seen world-leading but also agile enough to encourage new areas of finance. One of the new key areas, highlighted by Rathi, is ESG and green finance (an area recently added to the FCA’s remit) – an area many in the UK government see as an important area for the UK to build a leadership position in. Going forward, a successful post-Brexit regime will require policymakers and regulators to identify these new emerging areas and, to some extent, outmanoeuvre other regulatory jurisdictions with regulatory flexibility, working closely with the industry.