A referendum on the UK’s membership of the EU will be held on 23 June. If the nation votes to leave, two years of negotiations will determine how the relationship might work for trade, law and regulation.
A recent report from financial services lobby group The City UK pointed out if UK-based firms lost access to the EU passporting regime, they would forefeit the right to automatically supply services on a cross-border basis, impacting the viability of their businesses.
A vote for Brexit would mean creating an entirely new and bespoke arrangement, with no certainty of achieving this, the report said.
“In the event of such an agreement, the EU would expect ‘equivalence’ of standards from the UK,” the report pointed out. “This implies the UK would effectively still have to comply with EU regulatory standards and would thus have limited scope to set its own standards.”
Ronald Gould, Europe chairman for Compliance Science and a former senior adviser to the Financial Services Authority, said this potential divorce with Europe could get “very bitter” and those on the other side are not likely to make the transition easy.
“One area of Brexit about which we can take a more fact-based approach is regarding regulation,” he said, outlining several current certainties:
| What we know now |
| EU Directives (as opposed to regulations) have been transposed to UK law and will thus remain in place after Brexit, unless the UK government repeals them. Since most have broad-based local support, that seems unlikely. |
| Unless Brexit negotiations agree a different outcome, EU regulations will cease to have the effect of law in the UK after Brexit. For example, market abuse rules scheduled to come into effect in July would not apply, unless separate negotiations led to transposition into UK law. |
| EU arrangements for a single financial market would no longer apply, unless new negotiations created revised arrangements. This will impact stock exchanges, commodity markets and alternative trading venues, with completely new central clearing structures required. |
Lucy Frew, head of financial regulatory at law firm Kemp Little, said many providers and advisers have railed against EU regulations, but must consider what a regime could look like post-Brexit and what they might lose as part of the process.
“Broadly speaking, most UK-based advisers have little to gain and, if they have business operations or customers in the EU, much to lose from a possible British decision to leave both the EU and EEA,” she said.
The fallout will depend on which model is agreed by the government in the event of a vote to leave. One outcome would be the UK leaves the EU but remains part of the European Economic Area.
“In this case, the impact on advisers may be minimal,” said Ms Frew. “Members of the EEA [the 28 EU member states plus Norway, Liechtenstein and Iceland] are subject to the benefits - and burdens - of the financial services single market directives and regulations, including passporting rights; but with minimal ability to influence their development.”
EU directives transposed into UK law will, in principle, remain unless changed by UK statute. EU regulations, however, are EU laws and it is less clear whether they would continue as part of UK law.
Pinsent Masons’ financial services regulatory partner Elizabeth Budd said it’s hard to realistically see huge de-regulation, with instead domestic legislation used to create a “holding position” until deals are done, she said.
Rob Moulton, regulatory partner at law firm Ashurst, said in while technically the UK could ditch EU regulations currently being implemented, “practically, it ain’t going to happen”.
“Further down the line we might want to appeal a few things, but not any time soon. Passports are worth so much more than rule tinkering, although that is somewhat dependent on which sector you’re in.”
As for providers, Zurich UK Life’s head of regulatory developments Matt Connell said it was likely the various EU-wide regulations would be used as bargaining chips by the government.
Gareth Evans, head of corporate affairs at Royal London and chair of the Association of British Insurers’ EU committee, said it all depends on the settlement agreed between the UK and EU.
“I think most likely we’d opt for a European Trade Agreement much like the one Norway has, which would bind us to both existing and forthcoming EU regulations.”
ABI director general Huw Evans declined to take a direct view on the outcome, but said EU membership guarantees the right to do business in 27 countries on an equal footing, via which the UK sells “£21bn more in insurance and long-term savings products to the rest of the EU than they sell to us”.
