Analysis

UK and EU on the Verge of Regulatory Spat as Brexit Nears

While the clock is ticking faster for British Prime Minister Theresa May’s vote on her deal with the EU, it

While the clock is ticking faster for British Prime Minister Theresa May’s vote on her deal with the EU, it might tick even faster for financial firms. Should the UK proceeds to crash out of a united Europe without a deal, the ramifications for London’s financial industry would be material.

A couple of votes in UK Parliament in recent days warrant that in any scenario where Brexit happens, financial companies are going to face difficult times ahead. The optimism on part of industry players about the fate of the UK without EU membership are going to be put to the ultimate test.

This week, the euro zone’s finance ministers agreed that any companies willing to operate in the area would have to set up local branches. The move is likely to hurt every type of financial business that is currently working from London.

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The move has been a long time coming and Brexit contingency plans have been in place at most companies. That said, few companies have actually already taken steps, postponing their actions for a time when more clarity about the process is introduced.

3,000 Companies Could be Forced to Open EU Branches

As many as 3,000 financial companies are set to open EU-based offices in order to be able to continue servicing their clients in the single European economic area. With the looming Brexit deadline the difficulties associated with regulatory permits, moving staff, and finding the right place for a new subsidiary could be exacerbated.

The EU is giving more powers to the ECB and the EU’s executive commission in order to coordinate its response to a prospective British crash out of the EU. The no deal Brexit scenario, which many still fear is the worst case scenario, could lead to a tit for tat war between the EU and the UK.

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That said, recent votes in the UK Parliament appear to be making a hard Brexit scenario more difficult. The UK government will be stripped of its powers to change taxes in the event of a no-deal scenario.

Large and Small Firms

The initial plans of the EU’s authorities to apply the strictest set of regulatory rules just for investment firms with over €30 billion of assets. The latest discussions at a European level are pointing towards that amount being cut in half to €15 billion. The companies fitting into the group would be scrutinized just like the big banks.

Such firms include proprietary trading shops, market makers and companies which are underwriting financial instruments. In the meantime, smaller companies will be regulated under a lighter, prudential regime.

The new rules will be applied after a five-year transition period.

FCA’s Contingency Steps

The FCA earlier this week announced plans for the EU passporting regime which should remain in place for a short period after Brexit. Meanwhile, the costs of regulating securitization repositories and ensuring the contractual continuity for clients of brokers, payment institutions and other regulated businesses are all being affected.

Any chances for regulatory arbitrage are likely to be heavily scrutinized and could become political hot points for both sides. While the UK is on the brink of a general election or a second referendum, the UK financial industry will remain nervous, and rightfully so.

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