I’ve written before about the “do it right”, apolitical approach, and indeed mindset, of UK regulators, and this is visible again in Andrew Bailey’s recent speech. So too is the unwavering belief in the importance and value of open international markets, with high prudential and contact standards.
Before going on, it’s worth noting here, given the occasional rhetoric about a “bonfire of regulations” post Brexit, that UK regulators instinct might well be the reverse. It's more likely they will want to use the opportunity to try and establish the UK as a safer place to do business, with higher standards than currently.
But this week I want to focus on the dissonant meeting of a political Brexit process that is all about EU-UK trade-offs with a UK regulatory approach that sees the free international flow of financial services as critical to both financial stability and economic growth. It seems unlikely that both these approaches can prevail, and increasingly as though we are likely to get close to the edge before someone blinks.
To UK regulators, this makes no sense, evident in Andrew Bailey’s unconcealed frustration. One of the ironies is that financial services is one of the (I suspect few) sectors where Brexit is genuinely either win/win or lose/lose. However, it is only be natural for politicians to see in this a valuable bargaining chip in the wider negotiations, rather than a relatively straightforward area that can be resolved quickly. So negotiations about financial services may easily become tied up with other sectors that have no direct relevance but are part of the bigger chess game.
The other aspect to this is the unresolved Irish border issue, which has effectively pushed real negotiation back a further 3 months at least. This is again compressing the time window regulators and firms have to plan effectively, hence the reference to contract certainty. The agreement of a transition period effectively put some of this to bed, but the matter won’t finally be settled until there is an overall agreement. The current window is between now and December 2019 (i.e. a year before the end of transition), and while everyone is still talking about October 2018 as the date for agreement, the likelihood of this deadline being met is already fading.
This in turn is likely to put pressure on the current transition deadline of Dec 2020, timed to fit with the expiry of the existing EU budget period. This will therefore be difficult to re-open without also opening the Pandora’s box of further UK financial contributions and continued rule-taking.
The last thing UK regulators want is for these issues to become more politicized but that is starting to seem inevitable. For now they will press on with the considerable technical and logistical challenge of (re-)authorizing EEA branches and the other associated tasks. But a good chunk of the rest of the Brexit work set out in both the FCA and PRA Business Plans may need to be either extended or put on hold until there is more certainty.
For firms, meanwhile, the questions around whether to stick or twist with their current plans will become more acute. It now seems probable that the meaning of “transition” may need to flex, but this will be a long game and the more options firms can hold the better. Regulation and realpolitik approach these issues from very different places, and regulators’ and firms’ frustration is likely to deepen further over the coming months.
The cliff edge risks are symmetric in that they are present in both the UK and the EU. To reiterate, regulators and authorities in the UK and the EU share common objectives to preserve financial stability, and we have a common obligation to do everything we can and work together to do that. Financial stability is far too important to engage in a standoff.