Does Brexit Mean the End of Regulatory Cooperation in Financial Services and Life Sciences?

October 31st, 2016

An article by Charles Hastie, Regulatory Head, Clutch Group, entitled “Does Brexit Mean the End of Regulatory Cooperation in Financial Services and Life Sciences?” has been published in the October 28th, 2016 edition of Bloomberg BNA. An excerpt of the article has been produced below. Here’s a link to a .pdf of the full article.

Does Brexit Mean the End of Regulatory Cooperation in Financial Services and Life Sciences?

by Charles Hastie, Regulatory Head, Clutch Group

It has been a long-standing tenet of pro-Brexit campaigners that excessive European regulation serves to stifle U.K. industry; this claim played its part in the U.K. voters’ ultimate decision to withdraw from the European Union (EU). For pro-Brexit campaigners, withdrawal provides an opportunity to build a bonfire of red tape, liberate the British economy and secure a killer competitive edge in the global marketplace.

However, the early indications are that this may be a misreading, on a number of levels. It turns out that harmonization of regulation is not just a construct of the European Union, but rather an international phenomenon that goes hand in hand with the development and prosperity of a global marketplace.

By examining the impact of Brexit on two key industries, financial services and life sciences, we can see some striking similarities which may be harbingers for the future of regulatory cooperation. For both industries, it is parochial regulatory regimes that create most barriers to trade. This is why international efforts to globalize commerce are focused on harmonizing regulation among trading partners. Any attempt by the U.K. to go it alone is likely to be seen as a retrograde and protectionist step, with adverse consequences for trade.

UK Financial Services Regulation

In the case of U.K. financial services, most of the key post-financial crisis regulatory initiatives are of international, rather than European, origin. In Pittsburgh in 2009, at the height of the crisis, the G20 group of nations came together to ensure that banking problems were dealt with in an internationally harmonized manner. For members to implement tough policies that would work, everyone had to feel they were on a level playing field. Going it alone was not an option that would succeed.

For example, as an outcome of the 2009 Pittsburgh meeting, the U.K. committed to the margining of uncleared derivatives, a requirement aimed at decreasing the risks of transactions that are made directly between two market participants and outside of the control of an exchange or clearing house. The U.K.’s commitment to this rule transcends its membership of the EU.

Meanwhile, the new chief executive officer of the U.K.’s Financial Conduct Authority (FCA), Andrew Bailey, has signaled his support for the U.K.’s ongoing membership in the EU Single Market. Politically speaking, it is unclear whether the U.K. government will be able to retain membership while also leaving the EU. However, any potential membership is predicated on regulatory harmonization across member countries, a harmonization that can only be achieved by adhering to standards on the continent. The reason for this is to reduce red tape and barriers to trade. An EU citizen has no need to distinguish between, say, an asset manager located in Ireland and one located in Italy, because they largely operate under the same regulations.

Here’s a link to a .pdf of the full article.