Well-regulated and competitive financial markets lead to better allocation of pooled capital and long-term economic prosperity. Outside the EU, UK regulators will have the opportunity to re-examine existing financial regulations so as to refine them to suit UK markets. In the IEA paper, Improving Global Financial Service Regulations, we look at how the UK could create a more flexible, competitive and vibrant financial industry by:
1. Creating a flexible and agile UK regulatory environment
Key areas of financial regulation are already based on international standards aimed at avoiding systemic risks, terrorist funding and regulatory arbitrage. Future UK regulation must focus on outcomes and transparency rather than cumbersome and prescriptive rules so it can respond quickly to changes in capital markets and technology.
2. Using proportionate regulation to encourage growth and competition
Financial regulations must also encourage competition to keep the economy vibrant. Much of the existing EU regulations work well for large firms, but are stifling smaller, innovative or domestically focused firms. Post-Brexit UK Regulations must foster competition among providers and improve access to financial products. Global standards such as Basel III were intended to apply to internationally active firms, however, EU regulators applied Basel III capital requirements to all EU firms even though few conduct cross-border business. SMEs and start-up companies aren’t a systemic market risk, but requiring them to hold higher levels of capital reduces financial capacity in the domestic economy.
3. Forming a global alliance based on mutual recognition
Outside the EU, the UK can agree mutual recognition arrangements with its financial trading partners based on international standards, achieved outcomes, operational transparency and cooperation between regulators. While retaining existing EU equivalence agreements, the UK should also re-examine applications for equivalence, recommended by the European Securities and Markets Authority (ESMA), but not granted by the Commission. The UK should also work with other financial centres in championing the built-in agenda on services in the WTO and actively push for mutual recognition and the removal of trade barriers and anti-competitive regulations globally.
4. Developing a global fund management regime
The UK has the largest asset management industry in the EEA. Outside the EU, the UK has an opportunity to focus its asset management sector on the major capital pools in the world – Asia and the US. The UK authorities should consider reinstating s.270 of the Financial Services and Market Act to encourage more competition in fund administration. While UK asset management is predominately wholesale, the UK must develop its own authorised retail investment structure to replace and surpass the EU’s Undertakings for the Collective Investment of Transferable Securities (UCITS) regime, in order to offer a branded product to the fast growing regions of the world.
5. Collaborating with the European Central Bank on Euro denominated transactions
A handful of international financial markets such as London have developed globally due to the efficiency of concentrated capital markets. The UK provides 90 per cent of the EU’s wholesale financial services, which the EU27 does not have the capacity to replicate. Limiting access to UK financial services will therefore restrict EU economic growth. It is in the EU’s best interest to reach a collaborative agreement between the European Central Bank (ECB) and the Bank of England (BoE) as the US Commodities Future Trading Commission and the BoE have done for US$ denominated transactions and US regulated firms operating in the UK. Similar agreements between the UK and the EU would address the ECB’s systemic risk and market stability concerns without restricting Euro denominated trade to the Eurozone. It should be noted that the $US denominated UK based market is much larger than the Euro denominated market. In the year to date, the LCH Group Swapclear has cleared five times the value of $US swaps as Euro denominated swaps.
Shanker A. Singham Director, International Trade and Competition Unit
Catherine McBride Senior Economist