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Now we know what ‘Brexit means Brexit’ means, sort of.
But, like any good political statement, every answer generates more questions. Now that UK prime minister Theresa May has made it clear that the country will not seek to retain access to the single market and that a transition period will be sought for certain industries, including financial services, there are plenty of concerns.
Chief Brexit negotiator David Davis has said it is unlikely that the UK would be able to secure a transition period longer than two years. In that time, many international banks would have to undergo onerous restructurings and jump numerous legal hurdles to maintain access to the European financial services markets.
Meanwhile the government will be busy negotiating and executing an exit. It may find that this Gordian knot is itself made up of many Gordian knots. Among them will be the unprecedented procedure of extricating itself from the EU while finding a way to maintain membership of the World Trade Organization, because the UK does not have its own services schedule with the organization – this is something it would have to do before it is even possible to sign new trade agreements.
One thing that is not in question, however, is whether or not the UK should embark on substantial deregulation of the financial sector.
First, the UK’s own bank regulators have taken nearly every rule written in Brussels and made it even more stringent in the UK. This tendency to ‘gold plate’ regulations is not likely to disappear at a time of deep uncertainty for the UK’s future – not least because authorities are going to want to make sure that, whatever remains in the UK of the banking system, it is well capitalized.
Second, there is a general consensus in the industry that post-crisis regulation was and is needed, not least to address regulatory idiosyncrasies between jurisdictions that may have helped cause the crisis in the first place.
Credible body of work
Goldman Sachs CFO Harvey Schwartz told analysts on the bank’s January earnings call that “the body of work that’s been created by the regulators – whether it’s Basel capital ratios, the implementation of [the Comprehensive Capital Analysis and Review], stress testing broadly globally, the leverage ratios, the requirements around liquidity – all those things that were designed to address points to systemic risk”.
It is a credible body of work that regulators, industry participants and clients have created.
Bankers in the UK and Europe broadly agree. Having spent nearly a decade pouring vast resources into understanding and complying with new rules, they are loath to spend any more time on them, even if it is spent undoing them.
As one senior policy official at a UK-based bank says: “There’s 50 weekends a year. We spend 49 currently on implementing regulatory change. A lot of the things we want to be doing, like systems innovation, has been put on hold. Do we really want to start undoing all this? No. Maybe we want to stick with what we’ve got and move forward.”
Third, and most importantly, what UK-based businesses of all kinds want most is the ability to sell their goods and services to other nations. Now that ‘passporting’ is no longer an option, many financial institutions in the UK will be hoping its regulatory framework is granted equivalence to the EU’s. Nothing would kill that hope more quickly than a move to peel back rules mainly written in Brussels.
Some are pointing to potential deregulation in the US giving leverage to the UK to follow suit. But that too is unrealistic unless, once again, UK banks do not mind not doing business in Europe.
It may be that the world, nearly finished with its post-crisis regulatory agenda, turns its attention to economic growth, with some regulations getting taken apart as a result. But it will pretty much have to be the whole world, unless there are yet more profound changes to the structure of the (for now) global financial services sector.