With 23 June just around the corner and a vote deciding the future of the UK in the EU on the horizon, we at JWG have issued a ground-breaking report today – Brexit: changing out the engine of finance.
The report finds significant technical and leadership challenges ahead in the event of a decision to leave the EU on 23 June:
- We will have an abrupt start to a decade of uncertainty, as we attempt to maintain EU ‘business as usual’ AND change out the engine of UK finance
- Rather than reduce ‘red tape’, UK businesses will be stuck with a rule book that could change up to 60%, while new court judgements change the rules of the game
- A ‘mother of all change programmes’ will be required to minimise the psychological damage of Brexit
- The acceleration of RegTech development will be critical to the management of the programme
- The additional cost of Brexit to already bloated UK regulatory change budgets will be £17b through 2026 not taking into account fines for non-compliance.
The 24-page report provides a breakdown of how operations will change as a result of shifting and uncertain legal obligations. It finds vast operational challenges exist from trader workflow adjustments to tinkering with risk calculations to uprooting management controls and repapering client and vendor agreements – starting this year.
We’ll now go on to look at some of the main issues highlighted in the report, as well as considering the potential solutions for managing the Brexit change process.
Since 2009, the financial services sector has been hit by a regulatory tsunami with deep and invasive rules being brought into force right across the industry. G20, European and national legislative reform packages have created a technical and operational headache for firms in the UK and the argument has been made that too much regulatory red-tape is stifling innovation and hindering economic growth.
Current supporters of the ‘Out Campaign’ cite this overload as a reason for the UK to reclaim sole legislative incentive by voting to leave the European Union, however, with up to 60% of the UK’s financial services regulations being either directly or indirectly influenced by the EU, the process of transferring this portion of the rulebook to an exclusive UK model means that Brexit could become the largest-scale system migration project which the UK has ever undertaken.
This process of moving from the complex, multi-jurisdictional EU model of policy-making to a model which is concerned with the pure interests of the UK will be an unpredictable exercise. If the UK does decide to leave, we are in for quite a journey. Creating and implementing robust change management systems that can deal with the shifting rules and rotating requirements of a new era in the UK’s future could stretch infrastructures and people to the limit.
Restructuring so many legal requirements offers a once in a lifetime opportunity for the country’s representatives, lobbyists, legal counsel, compliance teams and all other concerned stakeholders to push for beneficial changes to the legal requirements. This creates a minefield of personal and public objectives which must be navigated within a minimal and restrictive timeframe.
Trading, risk, management and client rules may be called into question during this period and we may witness certain revisions or rejections of different laws. This creates uncertainty for businesses that are still required to meet their EU implementation deadlines up until formal withdrawal takes place, likely in June 2018. However, international standards and equivalence requirements may dominate the discussion and prevent too many diversions from the original EU obligations, especially if the UK wishes to agree a free trade deal.
The challenge of balancing these competing interests is immense and, in commenting on the report, PJ Di Giammarino, CEO, JWG, says: “The rules of finance are inextricably altered if Brexit is the order of the day. The immutable variable for all will be time. Spotting, knowing and making the right changes will feel like having an hour to count every grain of sand in the Sahara during a sandstorm.”
Firms should prepare to spend more in the wake of a potential Brexit. Costs are likely to increase across all departments, therefore, budgets and future forecasts will need to be amended in order to account for a worst-case scenario.
In light of this, the report goes on to break down the potential cost of Brexit into a three wave programme. The first phase of 2016-2019 takes into account the fact that UK regulators will be busy reshaping the rules. These first three years will be characterised by the most confusion of all other stages and, therefore, they will be the costliest. This is due to the fact that they encompass the post-vote hysteria and the post-exit isolation, as well as involving the most urgent rule changes.
The second phase involves the infrastructure rewiring, this means that as the new rules are set in stone, firms will be compelled to implement the necessary systems, policy, data, structural and commercial changes required to ensure a smooth transition.
The third phase which represents the final path to 2026 will need careful, sustained change management of detailed technical standards to maintain a compliant operating model. This wave will be characterised by a steady revision process involving final tweaks, amendments and the alignment of minor rules.
With this in mind, we have estimated that the total cost of Brexit will require an additional spend of between £14b and £20b in regulatory change management, with a median estimate of total costs reaching £17b by 2026. The implications of such costs may involve firms re-evaluating their future strategic plans and assessing their growth forecasts for the decade following the vote.
This has led us to conclude that all of these costs and the associated complexities place a high demand on business capabilities and the process of managing such a large degree of change would be impossible to achieve without a robust RegTech and change-management strategy. As previously mentioned, Brexit could become a ten-year project with a ten-year bill for legal, compliance, technical and operational advice. Therefore, developing a comprehensive strategy for RegTech will be essential in managing the rewiring effort.
Having a central managing framework will be crucial in dealing with regulatory overload without becoming overwhelmed by the revised policies. This is where emerging technologies, such as Big Data, Blockchain, and Artificial Intelligence, have the potential to alleviate much of the regulatory burden and manage change better, faster, cheaper, and safer.
Of course, any firm can throw money at technology vendors in an attempt to manage the surge in new, revised and rejected policies derived from the withdrawal process but it is only when the industry works together in applying them to regulation in a smart and safe manner, they become RegTech. If the actors come together to do RegTech right, politicians can appease their constituents, regulators will strengthen their framework in a sustainable manner, and firms can reduce the associated costs of Brexit while still ensuring that they meet their compliance obligations.