The Brexit referendum presented many opportunities for the City, but seven years on they remain at least partially unfulfilled, but very much within reach.
Following the financial crises in 2008 the EU looked to revise the way financial markets were regulated and at the same time could do so using new powers acquired through the treaty-making process. By 2014, the Eurozone states had the collective weight in qualified majority voting to impose upon the UK any financial regulation – an uncomfortable political reality for those wishing to re-join.
The EU’s Markets in Financial Instruments Directive and its Regulations (together MiFID II) came into force in January 2018, two years before the UK exited and so UK firms spent time, money, and energy putting them in place. With Brexit, there is the opportunity to review and revise the MiFID II regime, and this is being done partly via the Government’s Edinburgh Reforms, the Financial Services & Markets Bill, and the Future Regulatory Framework Review.
The UK is now able to use its own common law approach and no longer needs to be part of a regulatory regime designed – line by line – to be transposed into national laws after a convoluted process of opaque EU Council-Commission-Parliament decision-making.
The post-Brexit EU is also not static, and the bloc is conducting its own reviews and developing policies, including those on sustainable and responsible investment. Here, the UK commitment is delivering a UK Green Taxonomy with proportionality in mind, and thankfully free from the Franco-German clash on nuclear classification. It is also an area where the global development of disclosure policy and ESG definitions and measures may bring about changes where alignment in favour of other jurisdictions, notably the US, may make better sense for the UK.
As an international financial centre outside of Schengen, the UK’s visa system could be flexible enough to meet the rapidly changing needs of the industry and the international staff – including those from India, the US as well as the EU – that make it work. The UK could also, if minded, link things like qualifying executives under Senior Managers and Certification Regime (SMCR) also receiving fast-tracked visas or for longer periods.
Solvency II was the EU legislation implemented in January 2016, creating ‘harmonised’ EU-wide insurance regulations. Meaningful reform of the rules inherited creates the potential for the UK insurance industry to invest over £100bn in the next ten years in productive finance, such as UK social infrastructure and green energy supply, whilst ensuring high levels of protection for policyholders remain in place.
One measure widely welcomed by UK industry was repealing the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, and consulting on a new direction for retail disclosure. It represents a great chance to provide a more useful, meaningful, and effective regime for retail investors in today’s increasingly digital environment.
On this topic, the UK’s vibrant FinTech market has benefited from UK-based innovation through regulatory sandboxes, Innovation Pathways and Early and High Growth Oversight schemes. No surprise the UK is the most attractive destination for financial technology investment in Europe and unhindered by an EU approach currently dominated by ‘Open Strategic Autonomy’ and inward-looking plans for ‘tech sovereignty’.
The repeal of EU legislation on the European Long-Term Investment Fund (ELTIF) and its replacement by a new UK Long-Term Asset Fund (LTAF) provides a better fund structure for the UK market that may attract key international investors if properly marketed. LTAFs may also develop a role in the UK wealth market, depending on the outcome of the ongoing FCA consultation, an outcome entirely in the hands of the UK industry and officials.
Yet even this week, the Rejoin tendency has set out its stall. It would do well to remember that financial services is the UK’s premier industry, both in terms of employment and invisible earnings, and that Brexit has not only released it from the regulatory chains of Brussels, but reconfirmed and strengthened the City as one of the two leading global financial centres, alongside New York, providing Britain with immense geopolitical standing.
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