Brexit – the morning after
17th June 2016
Author: James Phillips, Regulatory Strategy Director, Lombard Risk
On Thursday 23rd June the voting to Leave or Remain happens. This is a pivotal moment for the UK, and indeed for the European Union.
Non-Britain EU cannot really influence UK voters now, but in the same way, the UK cannot really influence the exit rules, if the UK is suddenly lonely on 24th June. I think we do need to think about what it will be like, alone, if that’s the way UK is going. That is certainly where the trend has been during the last few days. So I’d like to share a thought on the amount of legislation needed to be changed if UK does exit. I understand that around one sixth of the legislation of UK law is EU-related. That does not include over twelve thousand EU regulations, including of course the Capital Requirements Regulation and many, many more that impact the finance industry. There will be multiple millions of pages of legislation to be rewritten under UK national jurisdiction, and for the one-sixth that relates to EU, then all that will need adjustment.
There is a cost to that, but there is also an opportunity to consider how this legislation might be re-cast to be better, fairer, in its own right let along to serve the needs of a solo UK. Perhaps that is worth having.
Some other considerations which may impact our industry which concern me:
The UK financial sector is a Very Large Part of the EU financial sector
For the EU it will like having one of the legs of a four legged table removed. Instantly, of course, other top cities will become the uppermost financial centres in Europe. That is not however going to remove the economic actuality that the UK leg is still actually there; it will have an ongoing life like a ghost amputation – the “feeling” will represent itself as an ongoing vast amount of business with the remaining 27. We should not however ignore the heavy warnings of doom and destruction that come from both the UK’s own financial and political leadership in respect of the disruption and disconnects. We should pay heed also to the same messages from the US, from China, and from the EU club itself, that to leave would be to burn some bridges. My feeling is that the voting generation carry a massive responsibility to get this right – the bridge can be rebuilt but it will take a generation or so. The UK’s innovation continues and as long as our financial sector remains innovative and nurturing, whilst using regulation to control risk then our leg at the table in Europe will I believe still be welcome. Not being a member of the EU does not close an impenetrable door, we just may have to knock and explain why we want to enter (for trade) but if we have innovative products and services to provide then market forces will keep the doors open anyway.
Still Basel, sill FSB, still G20
The UK is a player at the upper end of international economic governance with G20 influence (not just on global economics), but has a key a seat at the Financial Stability Board and at the Basel Committee for Banking Supervision and on many other equivalent and parallel committees too. We will continue to set the agenda for, and subscribe to, mutually agreed international governance parameters, not the least of which is Basel III and whatever comes with that. In or out of Europe, the UK will still apply these rules, maintain the levelness of the playing field as the benefits from transparency and thus risk mitigation will be positive benefits to be had. Leaving the EU does not make the UK into an opaque law unto itself.
For financial and regulatory reporting, the UK has put massive resources into adhering to EU standards. The legislative output from EBA, ESMA, EIOPA, and other bodies (and I am sure the same applies for hundreds of other legislative vehicles providing governance in sectors other than finance) has been adopted, transposed and operationalised. This is not going to be thrown away, it is not broken and does not need fixing. Whilst a solo UK may want to simplify red tape, and we can be sure this may happen in the event of a Brexit, after three, four, five years of significant legal expense to redefine the millions of pages of legislation. Nevertheless, we’ll likely still have COREP, FINREP, IFRS9 and other day to day necessities to deal with.
As for the price of tulips or champagne, I would not like to predict the impact!