8 February 2021

Free of the EU’s stifling legal system, British financial services will go from strength to strength

By Barnabas Reynolds

Like it, or loathe it, Brexit is an opportunity for Britain to reassert herself as a sovereign nation. For those of us who are optimistic about our post-EU future, we have only to point to the recent fiasco around the EU vaccination rollout as one example of how “taking back control” has already been beneficial. 

But to focus solely on individual disagreements, or passionate beliefs, is to miss the most significant difference between the UK and EU, which is our separate legal systems.  

Our respective legal frameworks – the entire basis on which we both operate – are profoundly different. Put simply, EU law is based on the uniform implementation of codes, whereas UK law is based on common law, developed over time and grounded in a respect for freedom.

This fundamental divergence between our two forms of legal reasoning underpins our respective ways of life, from the workplace to the home; from international commerce to individual transactions. 

Nowhere can this be seen more than in EU financial services law, which has, since the 1990s, been rolled out to operate across the entire sector, occupying every nook and cranny.

EU law, based on a Franco-German code-based approach, seeks to impose a uniform structure on all financial activity, in a manner that is inherently controlling. It tries to anticipate every problem and find answers in advance, adopting a method based on rationalist and scientific theory from the nineteenth century. The code reigns supreme. The main drafter of the French Civil Code put it starkly when, in 1801, he explained that the law is the expression of the “overriding desire to sacrifice all rights to political ends and no longer consider anything but the mysterious and variable interests of the State”.

The UK’s approach, by contrast, is quite different. The bulk of financial law is judge-made, with reasoning which proceeds cautiously and iteratively, each decision being based on preceding ones. There is no group of lawmakers treated as omniscient, able to identify a legal scheme in advance. Instead, private and public sector lawyers engage in the innovative and essentially collaborative task of applying the law to new situations. Arguments of the state and private sector are given equal weight. The result provides for extraordinary levels of predictability.

In no instance is the difference more apparent than in the role of judges. For France, the contrast was aptly described by Montesquieu, the French philosopher, who said as far back as 1748 that the “national judges are no more than the mouth that pronounces the words of the law, mere passive beings, incapable of moderating either its force or rigour”.

The EU system’s continental methods are particularly problematic for financial services. Its far-reaching code, interpreted by the European Court of Justice, attempts to impose order and structure on activities that are inherently disordered and unstructured. This has also involved applying a highly dangerous set of embellished arrangements for the Eurozone. The overall result restricts innovation. It also means the EU system is constantly behind the curve, and is left trying to catch up with market developments by making amendments to its codified operating system. The upshot is unsatisfactory for financial businesses.

Brexit means that  the UK is now free to make its own laws, and re-establish its own tried and tested approach. This will mean stripping out unnecessary rules – and there are many – and reverting to a method by which the law seeks to address only points of liability and restrictions where harm may otherwise arise, rather than matters of market structure or the imposition of a top-down, conceptual approach. There is an opportunity to ditch byzantine elements of the EU code, for instance the EU’s MiFID II and its 1.7 million provisions, which have led to a tick-box approach to compliance that serves neither the market nor the regulators.

Not only should the undesirable elements of the corpus of EU inherited law be removed. We must also see that our UK regulators can operate smoothly within the new UK system in a manner that maximises the certainty that common law brings. For that to happen, our regulators should be subject to checks and balances in the exercise of their rulemaking and supervisory powers. Under the EU scheme they have often been  reduced to being arbiters of whether poorly drafted EU rules were contravened. Or they have added further rules to provide clarity where the EU regime was lacking, most notably in applying what are seen as vague regulator ‘Principles’.

The overall result has been a lack of predictability for the industry, particularly in the modern environment in which regulators exercise a challenge function over firms.  We must now ensure the regulators operate under re-written powers and restrictions, so that parliamentary and judicial oversight can play their role.  There also needs to be expert input into the Treasury Select Committee’s oversight of the regulators, through a sub-committee operating under parliamentary standing orders, with all the investigative and evidence-gathering powers those contain.

The UK should seize the opportunity to re-establish the considerable advantages of its traditional common law approach, including the benefits of greater economic growth that research has shown to arise. Starting this legal reset with the financial sector would be knocking at an open door. EU law has outlived its purpose and the UK’s common law is already in place. With the sector poised to go from strength to strength, restoring the primacy of UK law would be a win for innovation, a win for the economy and a fitting first step for Brexit Britain.

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Barnabas Reynolds is a partner at Shearman & Sterling LLP and the author of Restoring UK Law: Freeing the UK’s Global Financial Market, published today with Politeia.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.