A vote in favour of Brexit in the UK will have huge repercussions for the financial services sector. The issues of political sovereignty, economic benefits, market upheaval or immigration aside, the consequences for the people within financial services will be huge. Whether it is their job or how they are supervised, Brexit will require a psychological change programme as behaviours within firms change and an emotional toll is paid by all.
Supervisor behaviour will continue to change
One of the core arguments against the EU in the UK is that the level of legislation imposed on its Member States is too high and that leaving would allow the UK to flourish in a low regulatory environment, as it would be freed from the burdensome regulations of Brussels.
The fact is that the UK, for financial services regulation at least, has been in the practice of ‘gold plating’ (strengthening) EU legislation since the EU’s inception. In addition, EU requirements for ‘equivalency’ mean that firms wanting to do business in the EU will need to prove that they follow the same or equivalent standards. The UK’s exit from the EU is, in no way, a guarantee that regulation, especially in the financial sector, will decrease.
The UK has always defined its own approach towards financial supervision and has often superseded its own G20 commitments towards regulatory change – let’s not forget that it was the UK, not Brussels, that introduced the Senior Managers Regime. Whether it has been its approach to the ‘twin peaks’ regulatory structure or its implementation of MiFID, the UK has its own regulatory culture. Brexit will only mean that the UK will have yet further leeway as to how it approaches financial services supervision.
We could expect to see, therefore, yet further evolution of the way that financial services is regulated within the UK, especially as there is the political risk of an even more restrictive ‘home grown’ legislative regime being put in place. That evolution may mean further cultural change, in the vein of the SMR, or a further transition away from ‘light touch’ supervision towards more intrusive approaches.
It is obviously hard to predict what will happen but new rules, and their adaptation or removal, will mean that staff will and won’t be allowed to do certain things that perhaps they were accustomed to. New language, new culture and new policy – all of the above will likely be employed in a post-Brexit UK and firms will need to prepare to adapt.
The psychological change programme
As with any change programme, there will be challenges to be overcome. McKinsey cites consistent role models as being one of the four conditions to changing the mind-sets essential for organisational change. Trying to change the value systems within financial services requires consistency from the top and changing behaviours resulting from Brexit will impact how successfully any new rules will be implemented.
Practically, this means additional work for firms to understand their position with UK regulators vis a vis Europe. New roles, contacts, and reporting channels will need to be created that ensure appropriate communication with supervisors and firms will need to adapt their compliance culture to their changing circumstances.
Many individuals, I’m sure, are already suffering from ‘regulatory burnout’ and further changes to an in-flux supervisory system will only incite more. The stress of cognitive dissonance, created when people find their beliefs inconsistent with their actions, will need to be managed carefully, as messages from the top, from supervisor or management, change yet again. Regulators and senior management will need to be very careful in how the change requirements are conveyed and adopted to avoid staff indifference and, ultimately, the risk of non-compliance.
Brexit’s impact on the workforce of the financial sector
Brexit’s indirect impact on the financial sector will be the matter of its workforce. As with any sector requiring highly skilled labour, the financial services industry employs a huge number of overseas’ workers and any renegotiation of immigration rules will have an impact on their job security. The potential changes implied by Brexit to the ‘right to free movement’ could have a significant impact on city workers. Not to mention changes to employment law, induced by Brexit, which could potentially make the UK a less attractive place to work (how many contracts will need to be renegotiated?).
Best case – preferential visa rules are implemented swiftly and EU workers can continue to do their job with minimal hassle. Worst case – visas, red tape and fees are highly disruptive (if only due to processing thousands of new applications), job security is threatened and firms will find themselves suddenly understaffed.
Uncertainty on this issue is itself a significant stress that can hinder staff productivity, especially when it comes with the increased workload and other burdens of Brexit. The worst case scenario will obviously have an even further impact. Again, senior management will need to be careful to assure staff, as best they can, with regards to their employment situation in order to avoid potential ‘brain drain’.
It is, of course, very difficult to anticipate what exactly will change regarding Brexit, but there are, nonetheless, emotional consequences to account for. Firms need to have a strategy on how to manage their organisational change from a human resources perspective, not just to mitigate shock to the business, but to understand how they might need to operate internally in a post-Brexit world.
Alec Gibson is a former Research Analyst at JWG. He spent over four years with the company, during which time he coordinated JWG’s Customer Data Management Group (CDMG), as well as contributing to our research and understanding of a wide variety of policy areas. He is now pursuing further academic studies.