How to unpick a 40-year-old EU rulebook?


In light of the vote to leave the EU, assuming the UK financial services industry wishes to continue to trade with the EU with the same freedoms as at present, broad equivalence with EU financial regulation will be in its best interests.

Banks, insurers and wealth management firms will now have to identify the core requirements stemming from EU regulations and directives that they need in order to achieve this, and then lobby the Government to stick to these requirements as they negotiate the terms of the UK’s exit from the EU.

The UK will, of course, have equivalence today. Unpicking 40 years’ worth of regulatory and legal evolution in the form of directly-applicable regulations, and domestic legislation in line with UK directives, is time intensive and laborious and not necessarily in everyone’s best interests overall.

What we are likely to see is a subtle divergence in regulatory requirements over time. For example, given the UK’s position against the bankers’ bonus cap, the assumption is this will be one of the first EU-led initiatives to change . But it remains to be seen how this would be done, and to what extent this would impact on equivalence negotiations.

It should be noted some countries, including the US, do not have equivalence across the board, which has not prevented them from conducting substantial amounts of business with EU-based firms.

The vote to leave the EU means some financial firms may now reconsider how they are structured for European operations. It is uncertain what arrangements might be agreed in place of the current passporting arrangements that many London-based firms use to avoid the need for multiple authorisations across Europe.

It seems likely the UK will push to negotiate an equivalence regime to replace passporting when the UK’s membership of the EU expires, to allow UK-based firms to continue to access other national markets in the EU relatively easily.

However, those negotiations are likely to take place within broader talks over the terms of the deal confirming the UK’s EU exit . This is likely to take many months, and quite possibly years, to conclude.

Some UK-centred companies with business across Europe could look to relocate to other European financial centres such as Frankfurt, Paris, or in some cases Dublin.

They may view passporting rights as so central to their operations that they are not prepared to endure uncertainty whether an equivalent regime would allow them to continue to use London as a base for Europe-wide activities. Those other financial centres may well view the UK’s exit from the EU as an opportunity to increase their influence and it is conceivable this could complicate agreement on an equivalence regime.

However, London is not just a major financial centre because it is a gateway to Europe through the UK’s EU membership and associated passporting regime established by EU law.

London is also an important centre for markets outside the EU, and will continue to be so even with the UK leaving the union. Firms will not necessarily be looking to move their central hub from the City.

From a regulatory perspective, I do not expect UK financial services regulation to suddenly deviate from that which currently applies throughout the EU. Much of the existing regulation is enshrined in UK law so any changes in approach will realistically come about gradually over a period of time.

 Michael Ruck is senior associate at law firm Pinsent Masons