Brexit affords UK chance to rewrite archaic EU financial laws

Brexit will bring London, one of the world’s top two financial centers, the opportunity to change how it does business. A regulatory re-fit can follow to remove unnecessary EU-driven red tape.

Too many of the EU’s regulatory initiatives after the credit crunch, though worthy enough in isolation, were far too burdensome — especially cumulatively.

{mosads}Legislators and regulators lost sight of business needs in their attempts to ensure financial institutions did not give rise to taxpayer liability.

Even when the sector had already been rendered safe through basic measures, such as introducing a bank resolution regime into the EU for the first time, further “safety” features were piled on.

Brexit therefore offers a great opportunity — it coincides with the review of regulation promised by the Trump administration for New York, the other global financial center.

The U.K.’s re-think should allow new methods based on sound legal thinking. For a start, Britain’s tradition of pragmatic, common law reasoning has never fit well with the civil law-based system of purposive reasoning in the EU. That can and should be removed.

Purposive reasoning has a stifling effect on financial innovation, as it requires lawyers to consider and debate what legislators intended, rather than adhering to the strict meaning of the words on the page.

The overburden of much EU-driven financial regulation needs pruning; it is generally unduly prescriptive and laden with unnecessary processes.

Often applied to new, emerging businesses, it dictates the forms and structures of those businesses before the market has determined the best way of operating.

Finally, many EU regulations are ill-suited to the financial markets and have not been developed with much sensitivity to the markets as a force for the good. The approach instead has been to treat the markets as sources of investment capital for industry, rather than having a value in themselves.

Looking to the future, the U.K. has two options. The first is to enter into an equivalence-based arrangement with the EU, along the lines used by other countries (such as the U.S.) for some aspects of trading with the EU. 

Under an equivalence structure, U.K.-based businesses would be able to trade cross-border into the EU without further licences or regulation. Such businesses would be solely reliant on U.K. regulators for all necessary licences and regulation.

This is similar to the current “passport” set-up, save that the U.K. will be free to re-write EU financial services laws in a common law style and remove laws irrelevant to cross-border EU business and to the concept of “equivalence”.

This would bring businesses the advantage of being regulated once while maintaining current distribution methods into the EU so long as the U.K. regime achieves a similar outcome to the relevant part of the EU regime.

Reciprocally, EU financial businesses would be able to operate through U.K. branches while being predominantly regulated in the EU under EU rules equivalent to those in the U.K.

The other option — one with much in its favour -—is for the U.K. to go it alone, freeing itself from the requirement to have equivalent rules to the EU.

Instead, the U.K. could design its own market rules that welcome all customers and counterparties who wish to access innovative and efficient financial services.

There is no need to impose EU-equivalent rules on the 80 percent of worldwide business in London just to allow “access” to the 20 percent with EU customers. That merely saves some customers the minor aggravation of coming to London for their services rather than the city coming to them.

In fact, it reverses the very basis of London’s success as a financial center for centuries, surviving on the ingenuity of its people, regulated in a manner tailored and close to the market.

Both options have their attractions. The first largely maintains the status quo, but with some improvements. The financial institutions would probably prefer it at this stage because it would involve no real change.

The second would be more free-market and enable greater sensitivity to the needs of the financial markets. It remains to be seen which option the EU wishes for itself.

Logic would dictate the first, as it gives EU corporates an easier route to access capital and innovation in London. However, if the second route is preferred, London will become an ever-more compelling destination for all. 

EU counterparties and customers would then need to make adjustments to access the city’s services at the lowest cost.

Asking financial institutions to deal with them through local, EU-based branches or subsidiaries would add considerable overhead to financial services when the cheapest, most innovative provision is what is so clearly required.

In reality, EU customers will continue to come to the market, as they have done for centuries. With either the equivalence or a financial center model, Brexit should be as much a win for the EU as it is for the U.K.

Barnabas Reynolds is a U.K. and EU regulatory lawyer who leads the practice at Shearman & Sterling. His book, “A Blueprint for Brexit: The Future of Global Financial Services and Markets in the UK,” is published by the London think tank Politeia. 

The views of contributors are their own and not the views of The Hill.