Some of Brexit's supporters in the financial industry think that the City of London will be able to thrive by cutting the EU's burdensome red tape. That already looked misguided before the vote. Today, it looks positively counter-productive.
According to Brexiteers such as hedge-fund manager Crispin Odey or ex-HSBC boss Michael Geoghegan, leaving the EU offers a great opportunity for the City of London to start a bonfire of the regulations. Pesky rules such as bonus caps on bankers' pay or curbs on fund managers' use of trading commissions to pay for research, which have been singled out by Brexit fans, could be torn up.
"Brexit will provide an opportunity to remove some of the regulations that impede the UK's ability to compete with the rest of the world," as brokerage firm Shore Capital's executive chairman, Howard Shore, put it on Tuesday.
It's hard to see what immediate gains this approach would reap. The U.K. already ranks above the U.S. for ease of doing business, according to the World Bank. The U.K. was also a cheerleader -- not a foot-dragger -- of pan-European proposals such as curbing fund managers' use of trading commission payments to fund investment research. Clearly on some level the current rule-book helps, rather than hinders, Britain.
And, Britain tightened its rules to respond to taxpayer anger on the fallout from the financial crisis -- that anger hasn't gone away. That's why Financial Conduct Authority Andrew Bailey said in July that the departure from the EU wouldn't lead to a "bonfire of regulation."
But the even bigger risk of pushing regulators to tear up the current rule-book is that it will steer the U.K. financial sector further away from access to Europe's single market under the principle of "equivalence." This status, due to be rolled out in 2018 as part of an overhaul of rules known as MIFID II, should allow non-EU investment firms the right to sell services or activities across the bloc without setting up new subsidiaries every time -- as long as their domestic regulatory framework is deemed equivalent to Europe's.
Pro-Brexit politicians like Daniel Hannan are dangling equivalence as a riposte to critics who say that leaving the EU means an instant blow to the City of London. "A financial institution doesn't need to be based in the EU to trade there," he wrote on Sept. 1 on the Conservative Home website. "All it needs is to be based in a jurisdiction whose regulation is deemed to be equivalent to that in the EU." And given the U.K. has been an EU member since 1973, if it kept its playbook pretty much the same it would surely be the dictionary definition of "equivalent."
The problem is that it's not entirely clear how widely European market watchdogs will cast their net in assessing the equivalence of U.K. rules. Will they care about the application of bonus caps, for example, which apply to banks but not most asset managers? Will supposedly technical standards be influenced by political considerations, given Britain is likely to be in the thick of Brexit talks when MIFID II comes into force?
If the U.K. tries to go its own way while still arguing its firms deserve equivalent status, it risks playing with fire -- even if, as Stephenson Harwood partner Richard Small suggests, it tries to implement a dual-track regulatory system for financial firms depending on whether they sell into the EU or not.
So instead of calling for rules to be shredded, pro-Brexit financiers should be focusing on thriving outside the EU while keeping access to its capital markets. It's true that a lot depends on diplomatic negotiations behind closed doors. But obtaining equivalent status is surely one route that's worth trying. And if that means keeping rules that have yet to dislodge London from its position as Europe's top financial hub, so be it.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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