As my previous contribution to the Brexit effect on analysis and reflection on the equivalence of the regulatory framework of the securities market (see here https://www.linkedin.com/pulse/brief-analysis-reflection-equivalence-regulatory-framework-breda/ and here https://www.linkedin.com/pulse/brief-analysis-reflection-equivalence-regulatory-framework-breda-1/), I am keeping to comment on Brexit.

With Brexit leave, there are very important issues regarding the inter-connectivity of international financial services, and how firms from other countries will be welcomed ( or not) by the main international jurisdictions.

The Bank of England and the UK Financial Conduct Authority (FCA) have stressed that the UK’s withdrawal from the EU should not be an opportunity to race to the bottom in regulatory standards. But last comment, FCA chair Charles Randall says, “we will need to redouble our engagement with our policymaking and regulatory colleagues in Europe and across the world, to continue to influence global standards of financial regulation”.

There has been increasing globalization of the financial sector over recent decades. The 2007/2008 and after the financial crisis led to a broad consensus for international regulatory standards and increased alignment to strengthen the global financial system. First Initiatives are led by the G20, through international standard setters, (Basel Committee on Banking Supervision or the IOSCO). All that led to making the financial sector more stable and secure? No, not all, because the level playing field has not been as successful as had been initially imagined. Often the divergence in the implementation of international standards is born from political choices. Are we sure that in the current political world climate, current international players will follow the politics of alignment? Or they follow other choices (driven by other interests)?

In this situation, it is unknown to what extent the UK will align or diverge from EU regulation post-Brexit. Maybe the weight of global standards could mean a degree of inevitable alignment. Follow or abandon them?

We know that the EU's commitment to global regulatory convergence around international standards is unwavering. At the same time, these global frameworks are not always fit for addressing concrete questions emerging in different contexts.

This reality is unlikely to change in the foreseeable future because the into market fragmentation from differences in international regulation and supervision and cross-border regulation, can be damage to the financial market. Efforts from UE and Financial Stability Board and or IOSCO are in a mutual market convergence.

To combat this protectionism in the EU, the European Commission is moving away from the use of directives as to the predominant method by which policy is legislated. Directives allow EU members to state discretion in their method of implementation. The Commission increasingly implements policy by regulations, which impose identical laws on EU member states. In this case, disparities in interpretation are less frequent.

Currently, the question of “equivalence” is analyzed on a jurisdiction basis with varying degrees of economic protectionism or differences.

Equivalence relies on a third country being assessed by the European Commission as having a regulatory framework for the relevant financial services product which is equivalent to that of the EU. A positive equivalence assessment can allow non-EEA “third countries” to access the European market. The Commission also needs to consider whether equivalence decisions would be compatible with EU policy priorities (international sanctions, anti-money laundering, and terrorist financing).

Mutual commitment to cross-border regulatory deference ideally should mean that market participants can rely on one set of rules – in their totality – without fear that another jurisdiction will seek to selectively impose an additional layer of particular regulatory obligations that reflect differences in policy emphasis, or application of local market-driven policy choices beyond the local market.

The UK has historically been permissive in its approach to allowing third-country financial institutions into the financial domestic market. Now, with this Brexit, this could change. UK financial and political authorities to helping uphold its place as a globally open financial market post-Brexit will have to “remain open for business”. The new Johnson Government could intend "remain open for business" as closing the season of mutual agreement with the EU and opening a new relationship with a new market. Hypothesis, Chinese or Middle-East/Arabic market? Or a mutual USA-UK financial market?

But the main attraction of the UK financial market was to be a country no- euro adopt, with different market and financial rules but inside the EU financial market with full access. With Brexit effective, why a Chinese investor should invest in the UK market if this market is no more linked with a mutual process in the EU financial market? It is important to remember that the EU is a wide financial market.

The opinion of Andrew Bailey, Chief Executive of the FCA argues for an assessment based on outcomes, not rules, it is very smart: “And, wherever possible, those outcomes should flow from global standards, which should always be the best test of equivalence. Our financial markets are global, not regional.”

The UK government is currently reviewing the future of financial regulation. Which approach it will adopt? On the outcomes-based approach? The UK’s future will align with international standards or tending forward on the protectionist approach?

Publication under the policies and in compliance with Albany International School, USA.

Re-published on https://www.linkedin.com/pulse/analysis-brexit-financial-future-uk-giacomo-breda