Could Brexit be Britain’s regulatory Trump card?
Regulation in Financial Services has been on a steady rise since the financial crisis. It becomes more detailed, intrusive and onerous by the day. Industry participants are pleading to the regulators to slow down and let things stabilise, but there is no sign of a slowdown yet.
There are multiple measures one could use to illustrate this point: number of rules in force, number of pages of regulation, and regulatory and compliance headcount to name but a few. One particularly instructive measure is the number of daily regulatory alerts issued by Thomson Reuters Regulatory Intelligence.
The service, which monitors more than 950 regulatory rulebooks, published by more than 550 regulatory bodies worldwide, issues an alert every time a rulebook is updated, a policy paper is issued, or a key speech or enforcement notice is delivered. By that measure the regulatory burden has been doubling roughly every two years since 2008.
Of course, regulation has its benefits. For example, improved financial and economic stability, protection of consumers and reduced need for recourse to taxpayer’s funds to support failing systemically important financial institutions. However, complying with this ever-expanding body of regulation also has a cost: both the direct cost of implementation and ongoing compliance to financial institutions, and the indirect cost of constraints in financing economic activity to wider society.
The problem is that many industry players now see the costs as exceeding the benefits.
President Trump is firmly of that opinion, and is tweeting bold promises on dismantling regulation in general, and Dodd Frank in particular, to free businesses from their shackles and drive economic growth. He is unlikely to achieve much of it, as the bureaucratic machinery of US government will surely moderate his attempts. Nevertheless, he may get some of it done and, leaving my opinion of some of his other policies aside, I personally think that would be a good thing for the industry – and that is coming from a consultant who built a career on running regulatory change projects!
So with the clock ticking on Britain’s exit from the EU, could Brexit be the time for the UK to take a leaf out of Trump’s book?
There is no doubt that Brexit will put some pressure on the UK’s world-leading position in Financial Services. Most industry players with significant operations in the UK are assessing their options, and newspapers regularly report new examples of “exodus” from the UK to other continental locations. “Taking back control” of financial regulation could be Britain’s opportunity to maintain or even improve its attractiveness for financial services firms. If the UK could use Brexit as a catalyst to simplify its regulatory regime, maintaining a core focus on key areas like capital adequacy and competition, it could reduce the cost of doing business in the UK, and in doing so help mitigate the risk of mass Brexit-induced relocations.
Unfortunately, I believe that is unlikely to happen, at least in the short-term when it could have the biggest impact, for three reasons:
- UK regulators were a leading force in shaping the current European financial regulation landscape
- In its own implementation of EU directives, where it has discretion UK regulators historically tended to gold-plate them and set the bar even higher, although the Tory-Lib Dem coalition did commit to stop that practice to help British businesses.
- The UK will need to maintain equivalence with EU regulation to retain full access to the EU market. The “Great Repeal Bill” approach is intended to do exactly that, by transposing existing EU legislation directly into UK law upon Britain’s EU withdrawal.
Perhaps in the medium to long term, as our post-Brexit relationship with the EU becomes more stable, some simplification and ‘loosening’ may happen. Whilst this would be welcome, by that time it will be too late. Market participants will have reshaped their operations to the new post-Brexit world, will have largely complied with the impending regulations, things will have settled, and the opportunity will have been missed.
So despite my better judgement, I find myself in a position I never thought I would: in agreement with Donald Trump. Since 2008, the regulatory burden has simply gone too far. Brexit could be Britain’s opportunity both to wind it back, and to insulate itself from the worst effects of a difficult Brexit deal.
In retaining our world-leading position in Financial Services, it could be our Trump card.