With the Prime Minister Theresa May indicating that there is insufficient time to replace European bodies with a new British regulatory regime, the implications of Brexit look to have limited short term impact on financial services regulation. However, beyond March 2019, what would a hard or soft Brexit look like in terms of future regulation?

The key components of Brexit revolve around the single market, free movement of people, law and regulation.

A soft Brexit would enable firms to continue to rely on regulatory passporting rights, as a continued participant in the single market. We could find that the post-Brexit environment is closely similar to the 'business as usual' environment that currently exists.

However, the implications of a hard Brexit, bringing about the end of the single market, would mean that the UK would be subject to regulatory third country equivalence under the European Union (EU). A potential outcome of this would be that UK firms would also need to be authorised in EU states to continue to do business with the EU.

Presently, the UK has some of the highest regulatory standards in the world, certainly in Europe. Leaving the EU is unlikely to dilute regulatory standards that UK firms are expected to follow. This is not least because regulators around the world, including in the UK, are keen to prevent a repeat of the 2008 financial crisis and so consider high regulatory standards essential. They will want to continue to ensure the security of financial markets and the fair and efficient operation of markets so that consumers have the best chance of receiving fair and transparent outcomes.

Notwithstanding UK regulatory standards, there is presently no equivalent regime in place for banking, meaning that UK banks would need to conduct EU business by way of a subsidiary located in the EU27. This is why we have started to see the movement and change in the geographical footprint of UK banks, leading to headlines claiming that certain banks are ‘quitting’ the UK. It could also transpire over time that we see an exit of overseas banks who originally came to the UK to have a presence in the EU. We may start to see the relocation of their UK subsidiaries as a result of a hard Brexit. 

Coming back to current regulatory standards, third country equivalence under a hard exit depends on whether the EU Commission consider that our regulatory regime is equivalent to the relevant EU rules, which potentially means that we’re in a solid position, assuming that relations between the UK and EU27 remain amicable. However, it is important to look to history in such a time when we are speculating about how the future may unfold. Historically, the EU’s granting of third country equivalence has taken at least 24 months. So for equivalence to be achieved before the UK leaves the EU would need to be high on the agenda for Article 50 negotiations. Otherwise, the result could be a disastrous pause in UK financial services’ interaction with the EU. The resulting interruption in trade and disruption to financial markets and services would be chaotic at best and at worst would have a traumatic effect on the UK economy as a whole, to which financial services contributes around 10% to GDP.

The best outcome, therefore, has to be a negotiated agreement for the UK that gives full access to all sub-sectors and markets across financial services and insurance before the UK formally leaves the EU.  

It is important that UK regulated firms begin to consider different scenarios based on various assumptions about equivalence arrangements and the different levels of access to the EU that firms may have after Brexit. Such scenario planning will provide a firmer basis for making strategic and operating decisions once the Brexit negotiations in progress around regulation become clearer.

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