With 2016 just around the corner, talk surrounding the EU referendum within the financial services industry is only continuing to heat up. After the general election of May 2015, the Conservative Party promised to deliver an in-out referendum on the future of the UK in the European Union before the end of 2017. No official date has been confirmed just yet, as we are still waiting for the results of a renegotiation of the terms of the UK’s membership with the EU, which is not expected to be achieved before the February meeting of the European Council.
The main issues at the heart of the renegotiation process are the governance of the single market and, in particular, the protection of non-eurozone countries; the need to improve competitiveness by reducing the burden of excessive regulation; the integration of an opt-out clause from the “ever closer union” objective of the treaties; and finally, the contentious topic of immigration.
However, what does the Brexit referendum mean for the UK’s financial services industry?
Who wants in and who wants out?
With the City of London representing the leading global centre for cross-border financial services, it stands to feel the impact of the impending vote and you can be certain that stakeholders have a very strong opinion either way as to their voting preference.
On the one hand, hedge funds have been quite public about their support for the Vote Leave campaign and a number have pledged their backing to the cause, both vocally, as well as financially. The reason for this is due to the high level of regulatory measures that the EU has imposed against the industry which has been argued to be burdensome and restrictive, as well as profit-reducing.
On the other side of the argument is the threat that a vote to leave would damage London’s position as Europe’s financial hub. The real fear is that a vote to leave the EU could signal a vote to leave London for many businesses that have established headquarters here in order to gain access to the single market. This fear is perpetuated by the uncertainty of the deal that might be struck or the model of governance that may be adopted should there be a majority vote to leave. The bilateral arrangement that Switzerland has adopted with the EU, for example, excludes free access to the single market for financial services. This has produced a separate debate about the UK’s need to ensure access to the single European market and the requirements that might surround such a deal.
We must not forget that the formal process of voluntary withdrawal from the European Union is relatively new, as an official mechanism was only enshrined in law with the ratification of the Lisbon Treaty and there have been no prior bids to leave the EU as it is known today. We are therefore in unfamiliar territory and deciphering the possibilities of an exit plan could be a futile endeavour. When a deadline for the referendum is set, we should hopefully find out more about the potentialities of an exit agreement but, for now, we will look at the current arguments that are fuelling the Vote Stay and Vote Leave campaigns.
A recent report showed that a vote to leave the EU could result in a permanent loss of 2.2% of the country’s GDP by 2030 if it fails to strike a free trade deal with Europe. While it is unlikely that such a deal would not be agreed, the report went on to conclude that the financial services sector would suffer the most following a potential Brexit due to the low possibility of enjoying the same freedom of trade that it currently benefits from. It is this debate around free trade and the implications of a potential free trade deal that is fuelling the Vote Stay campaign.
Commentators have argued that if the UK chooses to leave the EU, then the City of London’s status as a leading global financial centre will be put in jeopardy as firms may seek to relocate to within EU boundaries where they can enjoy the freedom principles without restriction. Britain’s financial services sector contributed £63 billion in taxes to the UK economy during 2012, therefore, the importance of the industry and meeting its needs is crucial.
Another point of consideration surrounds the regulatory requirements that will apply to the UK should it vote to leave but still seek free trade with the EU. Many commentators have argued that the UK would still be subject to the same legislative requirements, or it would need to prove equivalence should it desire to trade within the EU. AIFMD and MiFID, for example, outline that non-EU entities need to comply with equivalent legislation in order to enjoy the cross-border provision of products and services. Some legislative measures even go so far as to insist that business providers must be based within the EU in order to carry out certain activities. This includes UCITS, while MiFID II also stipulates that retail investors in the EU must have a branch based within the borders of the European Union.
Finally, if Brexit occurs with the UK subject to the European legislative agenda – should it wish to enjoy free trade – then it will be removed from the decision-making process and it may lose its position in the political balance of power. This could prove to have negative impacts on the entirety of the EU, as the UK generally represents a strong negotiating voice that balances the demands of other strong Member States. Therefore, it is purported that a vote for Brexit could leave the financial services industry of the UK in a weaker position than it currently faces. It would not escape the burden of complying with the EU’s comprehensive legislative regime, however, it may lose its seat at the table which sets this agenda.
It has been argued that, in the aftermath of the 2008 financial crisis, the EU has adopted an excessive regulatory regime that is stifling the industry by dramatically increasing costs associated with compliance and restricting global competitiveness and innovation. It is contended that a vote to leave the Union would open up the industry and allow the UK government an opportunity to set the pace of their own legislative agenda in line with international obligations.
Business for Britain’s ‘Change, or go’ publication reports that a move away from the EU could represent a move towards a stronger international presence, as the UK could become a leading voice in the global harmonisation of financial regulation. It goes on to assert that membership of large global Standard Setting Bodies, such as the IMF; G7/8; and the G20 would be maintained, however, the UK would then have a strong independent voice that would not need to ensure its alignment with EU objectives.
Similarly, it is felt that many European regulatory measures are derived from international standards and, therefore, an exit from the European Union could give UK regulators an opportunity to set their own regulation in a way that promotes growth and development of the financial services sector. It contends that compliance with equivalence requirements could be easily achieved as the EU, as well as the UK, would be following international guidelines and objectives, however, there would be scope to structure the rules in a way which better suits the market structure of the UK’s financial services sector. EMIR, for example, stems from G20 commitments and many of the obligations contained therein would need to be enforced even in the event of Brexit.
The Vote Leave campaign ultimately asserts that the EU is stifling the financial services sector with restrictive and extensive legislative measures. Therefore, Brexit could create freedom for the UK to become a more dynamic and competitive player in providing services at a global level.
What happens next?
With no agreement on new terms of membership currently on the cards or any further details about the timeline of the referendum, we can expect 2016 to be a lively and contentious year. It is predicted that the renegotiation process could be completed during the February summit of the European Council at the earliest. Uncertainty is currently the prevailing feeling as misinformation and various hypotheses saturate the Brexit discussion. However, the current debate is only beginning to kick off within the financial services industry and it will continue to intensify as different stakeholders declare their position and battle lines are drawn.