Institutions in the Global Financial Market
The financial regulation is mandatory to maintain finance and financial growth of the country. In 2016, the UK has left the EU after referendum that has created several opportunities and barriers for the UK and the EU. However, the impacts of the Brexit in the EU and UK are currently unknown and only dependant on the multiple variables in the both economies (Dhingra, et al., 2016). In relation to this, it has also become essential for the UK and the EU to build new financial regulations to get further advantages. But at the same time, there are some challenges in coordinating the financial regulations of both the UK and the EU after Brexit. The main thesis statement of this essay is to evaluate the impact of Brexit on the EU and UK financial regulations.
There can be a significant impact of the Brexit on the UK financial regulations. It is because it is mandatory for the UK to make changes in its existing financial regulatory framework to get advantages of leaving the EU and also coordinate with the EU financial regulations. It is because the most of the financial and banking rules and regulations are determined by global regulators, whereas the some of the UK regulatory standards are higher than that of the EU financial regulations (Wright, et al., 2016).
The economy size of the EU is seven times of the UK economy. Therefore, the UK has less power to negotiate the international trade agreements as compared to the EU. Apart from this, the half of the UK’s total trade is with the EU but 8% of EU trade is done with the UK. It shows a clear difference in trading between both countries as this may impact the financial regulations after the Brexit due to reduction in this trade ratio.
The Brexit can also impact the banking system by reducing its stability as UK and EU both regulators will handle any crisis in diverse means. It can cause legislative challenges due to low integration of the EU regulations in UK law. In such situation, it is crucial for the UK government to make the UK regulations complying with existing and new EU regulations to conduct the trade across the EU (Dhingra, et al., 2016). Due to differences in UK and EU financial regulations, it is challenging for the firms to conduct business across the EU.
Apart from this, it can also be issue for the UK firms to conduct the business easily across the EU due to increasing regulatory demands by the EU. The changes in financial regulations in the UK after Brexit can be effective for the UK based institutions to get benefit from lower capital requirements set by the PRA. Apart from this, new financial regulations can be beneficial for the UK firms to avoid burdensome EU legislation like the bonus cap, restrictive employment rights and proposals for a financial transaction tax, improvement in the City’s competitive position with Asian and US financial centres (Pisani-Ferry, et al., 2016). In addition, it can also be difficult to make coordination between EU and UK financial regulations after Brexit as it will cause loss of passport rights for the UK based firms in the EU members. However, these rights can be preserved by the UK by remaining in the EEA with adoption of EU regulations, but losing ability to influence these regulations.
However, the UK has two years of exit negotiations and reframing the regulations (Vickers, 2017). There will be freedom for the UK after Brexit to reframe its regulatory framework for financial aspects. It has its own compliance laws that are different from the EU, even some of them were framed in the UK before coming in the EU law. But at the same time, the UK will need to adopt and keep some EU laws in existence in the country to remain a relevant market participant in the EU economy. For instance, the UK will need to comply with the EU’s General Data Protection Regulation (GDPR) that will be regulated in May 2018. But the UK bribery act is not dependent on the EU as it will not be affected by the Brexit (Kierzenkowski, et al., 2016). In addition, employment law and the Modern Slavery act will not be changed after the Brexit. But, some changes can be noticed in financial regulations due to having leadership by the UK in the Europe previously.
There will be no immediate impact of the Brexit on the financial regulations in both UK and EU. But, the UK can make changes in its financial regulation by reaching an agreement with the EU that its firms may enter in the EU market on the basis of equivalence determinations. In such situation, it may be difficult to make coordination between the UK and EU financial regulations due to possible divergence of the EU regulatory regime from the EU regulatory regime. The UK has been the country which influenced the development of the EU financial regulatory framework. But after Brexit, it will not be possible for the UK to influence the applicable new EU measures and initiatives, which its firms used to exercise while operating the business across the EU. It may have a detrimental effect on the financial services of the UK.
The Brexit can impact on the banking industry of UK as there will be a decline in number of customers for the financial transactions. It will need to make changes in financial regulations to handle this situation and provide the stability to the financial framework of the country. After Brexit, there will be changes in the legal environment due to changes in laws and legislation that can also make mandatory for the UK government to make changes in the financial regulations (Kpmg, 2016). In addition, it will also be crucial for the UK to make changes in regulations related to cross-border banking, investments, deposits, payment and other financial transactions inside the EU.
There are problems in coordinating the EU and UK financial regulations because they affect to each other by harming the country’s interests. For example, Europe’s bonus cap is contributing in the hike of the salaries in banks and making the top bankers’ pay less flexible. It also affects the banking and financial system by increasing their fragility. These tough regulations have made it mandatory for the Bank of England to make new regulations to refuse to cutout payouts by the financial institutions (Lehmann & Zetzsche, 2016). Even, it is expected that the PRA and FCA will announce soon to give relief to smaller banks and asset managers in the UK.
Besides of the impact of the Brexit on the UK financial regulations, it can also be seen that the Brexit will also influence the financial regulations of the EU. After leaving the UK, it has been crucial for the EU to comply with the rules and regulations of the UK for trading and financial transactions. To continue their businesses, they both have to comply with the rules and regulations which are equal to EU’s like AIFMD. They also have to take care of the legal barriers that will be emerging (Minto, et al., 2016). If the firms which are in new EU failed to carry out their business practices with British firms, such firms will face serious issues. To protect the firms and provide them more support, it is mandatory for the EU to make changes in their financial regulations to trade with the UK in effective way.
Establishing the new agreements with the UK will take so much time and will affect the general public in carrying out their routine practices. It will also lead to uncertainty for many businesses. It is seen that the impact will not be only limited to the UK. The impact on EU is that the inward investment is reduced and the declining trade may slow down the EU recovery (Moloney, 2016). The EU will need to make changes in its financial regulations to cut their spending power and increase their contributions by the states. EU has lost a crucial net contributor to EU budget. The UK has also played a role in giving the EU’s regulatory laws.
The future of the financial sector remains uncertain and depends on the UK regulation. There was an impact on the Securitization aftermath of the financial services crisis, and there were low private- label securitizations: still, EU commission, with the European Central Bank promotes the securitization markets for functioning in an appropriate manner. There are high entry barriers for UK as EU is currently moving towards a secure and tougher regulatory regime (Pisani-Ferry, et al., 2016). The financial activities which are regulated by the British regulator will end up in losing their access to EU single market. There is a need to retain the EU-derived legislation to allow the major industries to carry their operations. Brexit reduced the overall stability as the crisis was different from EU regulators. There was an intellectual challenge in the international financial integration and regulation in post-Brexit Europe due to the conflicts between UK-EU. It forced the participants to give a thought on the dissimilarity between cross- border financial trade and a single market (Oliver & Williams, 2016). The EU financial system is largely combined with the global financial system. A risk for the European financial system can be faced as it is not able to perform its role effectively of resource allocation. But at the same time, after the Brexit, in Europe, the uniformity of the financial systems has increased.
There are two layouts that can be evaluated: in one London city remains within EU, in other it is totally outside (Hill, Smith, & Vanhoonacker, 2017). The second one could have major effects for the EU as London is seen to take competitive actions regarding regulation, taxation in order to cope up with the business operations. The favorable areas that are achieved for EU with the city of London are hard to produce again if these activities are scattered throughout EU. The clients from all over the world as well those of EU of the financial industry, have struggled to manage the effects of Brexit, it is clear that UK will be gaining advantage over EU at last if an proper arrangement is not attained (Wadsworth, et al., 2016).
The UK will no longer be liable to the EU treaties on the end of the exit agreement of the two year period. The EU regulations which are not preserved by the UK national law will not be effective for longer period. Therefore, it is not essential for the UK government to introduce new legislation for the EU regulations. In future, there will be no impact of the new EU legislation on the UK and the country’s financial regulations will not be subject to the jurisdiction of the CJEU after exit (Nugent, 2017). However, to do trading with EU more efficiently, the UK will need to make changes in its existing financial regulations to comply with EU law.
From the above discussion, it can be summarized that there is a significant influence of the Brexit on the UK and EU financial regulations. Due to the impact of the Brexit, it will be crucial for both EU and UK to make changes in their financial regulations to trade effectively and stabilize the economy and financial system of the country and members. At the same time, it can also be summarized that the financial regulations can be important for both EU and UK to make changes in the existing economic structure and benefit the public and country or members effectively. However, there may be difficulty in coordinating the EU and UK financial regulations due to their differences in formulation and execution. Overall, it can be stated that the Brexit have both positive and negative implications for the UK government and EU to make changes in the existing structure of financial regulations.
Nugent, N. (2017) The government and politics of the European Union. US: Springer.
Hill, C., Smith, M., & Vanhoonacker, S. (2017) International relations and the European Union. UK: Oxford University Press.
Wadsworth, J., Dhingra, S., Ottaviano, G., & Van Reenen, J. (2016) Brexit and the Impact of Immigration on the UK. Centre for Economic Performance. LSE, pp. 34-53.
Oliver, T., & Williams, M. J. (2016) Special relationships in flux: Brexit and the future of the US—EU and US—UK relationships. International Affairs, 92(3), pp. 547-567.
Pisani-Ferry, J., Röttgen, N., Sapir, A., Tucker, P., & Wolff, G. B. (2016) Europe after Brexit: A proposal for a continental partnership (Vol. 25). Brussels:Europe: Bruegel.
Moloney, N. (2016). Financial services, the EU, and Brexit: an uncertain future for the city?. German Law Journal, 17, pp. 75-82.
Minto, R., Hunt, J., Keating, M., & Mcgowan, L. (2016) A changing UK in a changing Europe: The UK state between European Union and devolution. The Political Quarterly, 87(2), pp. 179-186.
Kpmg.(2016) [Online] available at: https://home.kpmg.com/ie/en/home/insights/2016/10/future-financial-services-regulation-brexit.html (Accessed: 4 August 2017).
Dhingra, S., Ottaviano, G., Sampson, T., & Van Reenen, J. (2016). The impact of Brexit on foreign investment in the UK. BREXIT 2016, 24.
Wright, M., Wilson, N., Gilligan, J., Bacon, N., & Amess, K. (2016). Brexit, private equity and management. British Journal of Management, 27(4), 682-686.
Dhingra, S., Ottaviano, G. I., Sampson, T., & Reenen, J. V. (2016). The consequences of Brexit for UK trade and living standards.
Pisani-Ferry, J., Röttgen, N., Sapir, A., Tucker, P., & Wolff, G. B. (2016). Europe after Brexit: A proposal for a continental partnership (Vol. 25). Brussels: Bruegel.
Vickers, J. (2017). Consequences of Brexit for competition law and policy. Oxford Review of Economic Policy, 33(suppl_1), S70-S78.
Kierzenkowski, R., Pain, N., Rusticelli, E., & Zwart, S. (2016). The Economic Consequences of Brexit.
Lehmann, M., & Zetzsche, D. A. (2016). Brexit and the consequences for commercial and financial relations between the EU and the UK.