Immediately following the June referendum it was thought that, in financial services generally and wealth management in particular, European Union regulation could be rolled back and a less burdensome and better targeted UK-only model established: the “regulatory dividend”.
More sober assessments followed, based partly on the FCA’s 24 June statement that implementation of both Mifid and other important EU legislation would not be abrogated.
A key reason was that the time to initiate and complete the Lisbon Treaty’s Article 50 process would be well over two years. So until the first quarter of 2019, and possibly longer, we would remain an EU member state with all the rights and obligations this entailed.
This meant that for a substantial period the regulatory dividend, even if theoretically possible, could not in practice happen.
Other problems arose. There was a split between firms not wanting the passport because they had no EU-based clients, and those wanting to retain single market access. A UK-only regulatory dividend could work only for the former. The UK authorities made clear there will be no reduction in the UK’s regulatory standards and methods, Brexit or otherwise.
Finally, much of EU financial services regulation has been invented in the UK, exported to the EU, and re-exported back as an EU product. As the progenitors of much of what we have to do inside the EU, we are bound to continue with our own creations once outside it.
This situation may help with UK/EU equivalence arrangements post-Brexit, but it does not bode well for the regulatory dividend. Can this be possible? Or is it a fiction?
The WMA has examined this and come up with two sets of proposals for the Government to consider.
First, the approach to take to regulation post-Brexit in order to accommodate the different requirements of different firms. And second, a hit list of quick wins relating to infelicities in EU law that are unsuitable for the UK, and could be unpicked quickly, possibly without adversely affecting equivalence requirements.
On the first issue we have set out a three-phase approach. First, EU arrangements will stay in place in the UK during Article 50 talks until Brexit. As part of the separation package the Government should negotiate a deal on equivalence.
The UK will be fully compliant with EU law and regulation at separation so the case for temporary equivalence, say, two years, is strong. This would provide stability and continuity for firms while the Government reviews and consults on the UK’s longer-term relationship with the EU and rest of the world.
It should assess three options for our sector: a UK-only regime, an EU equivalent structure, or a mixture of the two, depending on whether a firm did any EU business. Implementation of its conclusions will mark the end of transitional phase two and the start of the longer-term phase three in which the UK’s new relationships are established.
On the second we have itemised a series of regulatory points which can easily be cleared up and improve regulation in so doing.
They include: capital requirements for investment firms (already being worked on by the EBA); scrapping legal entity identifiers for retail transactions; removing the 10 per cent fall reporting requirement; terminating investment trusts’ automatic definition as complex; aligning verification requirements in Mifid and AML legislation; aligning Mifid/Priips costs and charges; eliminating the €100,000 bond denomination threshold and revising the short selling regulation
to stop unnecessarily penalising retail market makers.
Getting phasing and quick wins sorted would be a regulatory dividend indeed.
John Barrass is deputy chief executive of the Wealth Management Association