A referendum vote by the UK in favour of leaving the European Union would have a very significant impact on all financial institutions in both the UK and the rest of Europe (REU).
Financial institutions with UK/EU cross-border operations would need to consider the potential impact on their business of having to operate in a new legal and regulatory regime. Depending on the terms of the post-exit UK/EU relationship, a Brexit could affect the ability of financial institutions to provide services on a cross-border basis into REU or from REU.
Firms’ marketing and operational arrangements may be affected; for example, firms providing investment services, financial products or funds would need to take account of the impact of Brexit on investment mandates, product terms and product marketing arrangements. A Brexit may also have an impact on cross-border capital market transactions which may affect the UK’s competitiveness in the market and its attractiveness as a listing destination for issuers.
Given the extent to which EU law is embedded in the regulation of financial services in the UK, a Brexit would have a major impact on existing UK regulations. Recent events, such as the UK government/European Central Bank court battle over proposed requirements for euro trading clearing houses to be located within the eurozone, demonstrate the potential for detrimental impact on the UK’s financial services industry where the UK is unable to influence new measures and initiatives affecting financial institutions wishing to conduct business in the EU. In addition:
• The UK could end up in a less advantageous position with regard to any future Trade in Services Agreement currently being negotiated by the EU with other members of the World Trade Organisation.
• UK reinsurers could be excluded from the opening up of the US reinsurance markets under any future US/EU agreement on reinsurance, on which the parties have recently started negotiations;
• A Brexit could also preclude the UK from participating in the creation of the EU Capital Markets Union.
The precise impacts of a Brexit will depend on the timing and outcome of negotiations between REU and the UK, and also on the future structure of the UK’s relationships with the rest of the world. For example, of key relevance will be whether the UK would be included in the European Economic Area, and benefit from the arrangements in the EU that facilitate the cross-border provision of financial services between EEA member states or the extent to which the UK could negotiate equivalent positions to the EU in its relationships with the rest of the world.
To an increasing extent, UK financial services and capital markets regulation is driven by EU law. Where EU law has been made by way of directive, there will be implementing legislation in the UK that could continue to apply, subject to any amendments that may be necessary to acknowledge that the UK is no longer part of a wider EU legal or regulatory structure. Alternatively, the UK could diverge from the requirements of the relevant directive by amending that legislation.