Because I was on Leave last week, I wrote Part 1 of this blog last Monday, expecting to have to make only a few minor updates after the Chequers summit. As a result, I've inadvertently found myself in the middle of a thought experiment, wondering what I would have written differently if I’d composed it after David Davies’ and Boris Johnson’s resignations. And should I change the original...
I decided instead to leave last week’s thoughts intact but to add a short Part 2, which indicates, from a regulatory perspective, how the situation may have become both more complex and simpler in the last 72 hours. As for next week…
I’ve written consistently in this space that regulators across the UK and the EU27 are primarily driven by the urge to avoid messiness whenever and however Brexit arrives. Despite this well-argued article (see link), that remains my view – the regulatory risks of any alternative are simply too great to play around with. But it’s increasingly evident that the other forces at work are potentially both strong enough and sufficiently uncontrollable to override what would otherwise be the obvious way forward.
Part of the EBA’s calculation may be their assessment of the unpredictability of the political negotiation, in which financial services is just one of many sectors, unlikely to be agreed solely on its own merits. It's much more probably to be swept up in a complex basket of trade-offs. In this context, the relative absence of transparent negotiation is almost more worrying than an open disagreement would be.
The regulatory response to this could take at least two different, but not mutually exclusive, routes…
The first would be to continue, perhaps more stridently, to make the case for a public commitment on financial services to minimise uncertainty. Despite “strident” being the antithesis of their preferred tone, regulators would be reluctant to forsake this approach entirely. No matter how unproductive, they will consider it a point of honour to keep making the public argument for taking as safe an approach as possible to a shift that is as potentially seismic and unpredictable as Brexit.
Pursuit of the second route would follow an acceptance of the reality that, as regulators view it, “reason” isn’t working, at least not by itself. This may have already happened, and if so they will already be doubling down on working the back channels, with firms and politicians alike. In this context, the committee structure recently agreed between the Bank of England and the ECB to help manage and mitigate the volatility around Brexit, takes on heightened significance. Among other things, it provides a mechanism to de-politicise. Therefore, I wouldn’t be surprised if its structure broadens, both in membership and scope, seeking to bolster confidence around what will actually happen in the period leading up to and just after the UK’s departure, whatever its eventual shape.
This is not to say that regulators’ strategies will be effective. Politicians see other imperatives, and ultimately these may take precedence, whether deliberately or simply through the momentum of circumstance. It’s fascinating for example to read Andrew Bailey, in a speech a few months ago, and Jacob Rees Mogg, in an article last week, both focusing on the 1846 Repeal of the Corn Laws but from utterly different perspectives. Where the former saw a step towards the modernity of globalisation and free trade, the latter saw break up of party and the sacrifice of political power.
Given recent events, I suspect regulators will essentially forsake the first route, largely withdrawing from a public discourse that is only likely to become more rancorous. They will continue a token presence, as their public service role and accountability requires, but their energy is now likely to be all but exclusively focused on leveraging the back channels. Such an approach is likely to mean other activities are further deprioritised, only some of it visibly, as regulators wrestle with the implications of different potential scenarios.
So far, so complex… But there’s also a sense in which the situation have become simpler for regulators. Until now, as I’ve written before, they have needed to juggle political with regulatory timetables. Now, given the political situation, regulatory timetables will increasingly trump political. By this reading, ironically, we may see UK regulators moving towards something resembling the EBA position.
courting financial uncertainty may come at a price for the bloc. First there is the risk that it perversely weakens its own financial institutions, while not changing much in the wider financial ecosphere. Many of the regulatory sticks the ECB has to wield will primarily affect EU financial firms.