Brexit’s Regulatory Impact to the Banking Industry

Transformation

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September 11, 2016

With the upcoming Brexit, all financial institutions will face regulatory impacts – from banks to insurers to mortgage broker dealers. For banking specifically, though, there are many factors that can be considered potential positives in terms of regulation standards following Brexit. UK standards already lead regulation in several areas, such as Retail Distribution Review (RDR) implementation in 2013, tougher Bank of England stress tests in 2014 and ring fencing of retail banks from their commercial arms beginning in 2019.

Additionally, UK institutions already comply with financial and banking rules set by global regulators such as the Basel Committee and Financial Stability Board, along with existing EU legislation. This should help facilitate participation in the European Economic Area (EEA). UK institutions may also see increased benefits from lower capital requirements set by the Prudential Regulation Authority (PRA) in 2012.

Even so, there will likely be an ongoing need to comply with new EU regulation in order to continue to conduct business across the EU. Even when the UK exits, it is probable that firms wishing to conduct business across the EU would face increasing regulatory demands and, in all probability, still be required to comply with Markets in Financial Instruments Directive (MiFID) II rules when they are introduced in January 2018.

The current MiFID legislation regulates the conduct of investment services in Member States, such as the trading of securities and derivatives, the execution of client orders, underwriting, and portfolio management. MiFID II creates a harmonized regime for access to the EU Single Market for non-EEA investment firms, and qualifying non-EEA firms would then be able to service eligible counterparties without having to establish a branch in each EEA member state. Considering the time frame for the UK to exit the EU under Article 50, it is possible that UK firms will be able to rely on MiFID II.

Switzerland provides an illuminating example for provisioning of financial services in the EU. Around 20 equivalence agreements have been struck between the EU and Switzerland to cover a range of financial services sub-sectors; in order to reach these agreements Switzerland has had to largely adopt EU frameworks in its national regulation, and must adapt them in line with changing EU regulations so as to maintain their validity.

While there are still more questions than answers surrounding what Brexit means for Financial Services firms, there are some preparations that can begin now.

For everything you want to know about Brexit’s impact on the Financial Services industry, click here.

 

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