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Discussion

Discuss about the Impact of Brexit on UK and EU’s Financial Regulation.

Britain left the European Union on 23rd June, 2016 that resulted in depreciation of value of pound. After exiting European Union, there has been transformation in relationship of UK with Europe countries. One of the largest financial center of European Union is United Kingdom attracting a wide range of financial service providers and global banks. Brexit resulted in unknown effects that changed the consideration of UK as the best countries for starting business. The Bank of England is expecting to lower the rate of investment to be around by 29% in year 2019 (Bekaert et al. 2017). This would damage the productivity of future growth and impact of UK leaving European Union would result in long-term and permanent economic cost on the country. Domestic inflation is rising faster resulting from soaring cost of imports. There has been cloud of uncertainty to the firms as the business investment has suffered resulting from future trade agreement of UK with rest of the European Union. The standard of living in UK are highly uncertain and negative due to consequences of Brexit. Exiting the European Union by UK has changed the law establishing their regulatory framework (Burns et al. 2017).

One of the sector that is central to the success of UK economy is financial sector representing 7% of Gross Domestic Product. There was a sharp drop on banking stocks, driving the financial business away from UK to some other cities of EU. It is yet to determine the EU and UK relationship post Brexit. The nature of financial regulation of UK would be significantly changed following the exit of UK from EU. Financial sectors of UK has been designed, supervised and applied by the framework provided by EU. However, the extraction of UK from the financial governance of EU will have consequence that are long-term in duration and disruptive in nature.  There will be various diminishing of international standards that imposing the preferences and ability of UK for influencing them. UK’s four channels will protect interest of financial regulation. Regulatory capacity issued by UK for negotiating access to their country make that has been issued by EU will no longer be able to benefit UK post Brexit (Crafts 2017).

It would be difficult to negotiate new trading relationship as the stocks of UK has its worst fall since the financial crisis. Following the referendum, the stock market remained volatile along with future economic slowdown. Since investors fear the fallouts of struggling Eurozone economy and financial markets is left with high uncertainty after the UK has left European Union. The perception of uncertainty was fuelled by UK financial sector voted to leave the EU that has resulted on decreasing risk appetite. The impact of withdrawal of UK is not only limited to UK but the economic forecast has an economic impact for the rest of Europe. It has been forecasted that growth in euro area would reduce to 1.4% in year 2017 compared to 1.5% in year 2016 (Sampson et al. 2016). Brexit results in one of the most important concern of the terms on which financial institutions and banks will be accessing to EU single market through reciprocal arrangements. Brexit has hit confidence of business and the service sector is at five-month low.

Impact of Brexit on the UK economy

There are three factors impacting the financial sector of UK that is the adequacy of withdrawal between the EU and UK, UK financial sector resilience to Brexit through its position and broader global relationships and the extent to which the operations is moved by UK based financial firms. Following the Brexit, it is less likely that regulations would be lessen as much of regulations originates from Brussels. There are some financial regulatory requirements that are resisted by UK such bonus tax. The perceived need in UK is derived from requirements derived by EU. Regulations would have direct impact on UK through requirements.UK is required to comply with EU regulations if they intend to do continuous business with remaining EU member states for meting an equivalent assessment. However, they are required to challenge, negotiate and influence those regulations. Banks at minimum may be applied inconsistently and they would be faced with having to comply with EU as well as UK regulations. Financial service sector are meeting with high degree of uncertainty after UK has left EU. UK has been the destination of exports of financial services from EU as they are heavily reliable on them. Government of UK would be influenced by the exit in the important exit negotiations. Contingency plans are required to be implemented by such institutions in order to achieve continuous access to the single market. Access to massive single market in financial market will not be able to access by UK financial service industry. Financial services passport will not be able to access by UK market (Gee et al. 2016).

Uncertainties and cost will be generated by exiting of UK from EU for the firms or organizations not trading with EU.  The resulting impact is due to the change in the financial services legal operating environment in UK. Financial regulation is directly applied in the UK in form of EU regulations. Post Brexit, rules will be ceased to have legal impact. Financial service sector will have minimum disruption if there is unpicking from the macro EU financial regulations. Financial stability will be supported and investors will be protected by a coherent and stable micro UK financial regulation (Jafari and Britz 2017).

It is also required to consider the implication of Brexit for financial institutions pass porting their financial services into United Kingdom. Institutions access would be restricted due to exit and this will lead to change in framework. It is predicted that there will be introduction of distribution framework that will minimize the disruption to access that is currently enjoyed by such institutions to the UK market. 

Percentage of change in business investment

Financial regulation is large scale and becoming increasingly large scale. The will to create financial regulations across borders is attributable to the worldwide financial crisis. The body that seems to be effectively regulating the financials is G-20. One of the critical fact for the smooth functioning of the financial markets is financial regulations. The integral part of attaining economic growth of any country is maintenance of financial regulations. Changing economic patterns in any country can be dealt with adequate finances. Regulations and policies forms the part of law that is set by government (Dhingra and Sampson 2016). An impenetrable mass of requirements and restrictions is depicted by web of regulations surrounding experiences.

An emergence of multi polar financial system will be triggered in Europe resulting from exit of UK from EU. European economy will have continuous flow of financial services. UK would be fighting to preserve the related business while competing with twenty-seven other European countries and other cities. After UK leaving the EU, the regulator of member state would not grant authorization. Countries in European Union are competing to attract business after Brexit (Moloney 2016).

The regulatory framework of financial services post Brexit still has to be found in particular on the third country central clearing and equivalence regime. Uncertainty is related to the regulation of financial services and their supervision in UK and EU after the Brexit. There is a third country equivalence regime in theory that enables the UK regulated firms to access the market in European Union. After the Brexit, city firms would have high risk to develop its business in EU. The current weakness of outcome based regime needs to be filled and it is concluded by EU authorities that there is a need to revise the equivalence regime for ensuring the possibility of reflecting financial regulations revolutions (Ottavian et al. 2014). An entirely new situation is created by Brexit regarding the equivalence regime by posing a question that whether the regime was meant to open the market of EU for relatively marginal or incremental business from their countries are operated as the main tool for regulating the EU market. It is quite uncertain that necessary level of trust and cooperation will prevail between EU and UK on financial services given rivalry and their divergent interest. Regime of EU equivalence will be beneficial post Brexit of the progressions of European financial regulations are followed by UK (Matthews 2016). Rather than being regulation maker, UK needs to become European regulation taker.

The landscape for financial service will be determined by level of policy coordination between EU national regulators and UK. London would continue to operate as a financial center because the process of relocation of City firms will be minimal as there is lack of absence of coordination between national regulators. The relationship between UK and EU agreement in future forms the basis of ultimate impact on regulatory framework of UK. The EU can apply some of the options and UK that would help in determine their future relationship. The following points listed can illustrate it.

  • UK has the option of not seeking of retaining EEA membership and negotiation of bilateral arrangements.
  • Norwegian option is another option that UK and EU could opt for. UK would be able to preserve the financial institutions passport rights by becoming the member of EEA.
  • Swiss option is another option that could be opted by EU and UK.

The supervisory convergence and standards setting coordination from the perspective of EU is regarded as technical issue having limited consequence politically. An obvious political dimension is acquired following Brexit and for building single market, rules should be applied in a consistent manner throughout the Union. Lacking coordination is theoretically a deadly trap and one of the factor essential for EU project is economic coordination. Area in which the EU financial services single market has most to do is to have divergence interpretation of the rule. Game theory can be well explained by the challenges faced by EU and the member would be able to receive benefits if they manages to non-cooperate. Challenges of aced by EU is propelled when they are faced with some other problems such as security and migration (Crafts 2016).

Relation of EU and UK will be affected by problems faced in financial services. Some of the issues faced EU financial sector due to new approaches are supporting investment, financing new economy and sustaining the social market economy of Europe. A new shock wave was sent through the global financial system resulting from Brexit that urge the enforcement of new regulatory framework in EU that will lead to creation of more resilient banking sector for protecting the tax payers and depositors. After Brexit, the largest financial market of Europe will move outside EU leads to the creation of deeper capital market.

Strategy of EU should be to concentrate on revising the equivalence regime for ensuring flexibility in addition to passport regime. In order to avoid supervisory race to the bottom between twenty-seven member states of EU, it is required by them to focus on convergence of supervisory settings and standards settings.  Until the completion of Brexit, the future of financial services of EU is dependent on tactical moves and game of influence that will happen on both sides (Van Reenen 2016).

Conclusions:

The passport rights of member of EEA would be restricted to some degree concerning the passport rights of UK financial institutions. This would happen unless the member of EEA would be involved in future relationship of the UK and the EU.  It can be concluded from the above discussion that there will be sustained period of business uncertainty post Brexit. Firms needs better policing for mitigating the immediate risks and capitalizing on long-term opportunities. Apart from having short-term effects of Brexit, the ultimate impact of UK exiting EU is likely to be more negative rather than positive. However, it is uncertain to know how big the impacts of Brexit are on UK economy and firms operating therein.

References:

Bekaert, G., Harvey, C.R., Lundblad, C.T. and Siegel, S., 2017. Economic and Financial Integration in Europe.

Burns, C., Clifton, J. and Quaglia, L., 2017. Explaining policy change in the EU: financial reform after the crisis. Journal of European Public Policy, pp.1-19.

Crafts, N., 2016. The Growth Effects of EU Membership for the UK: a Review of the Evidence. Competitive Advantage in the Global Economy (CAGE), Global Perspectives Series: Paper, 7.

Crafts, N., 2017. Brexit and state aid. Oxford Review of Economic Policy, 33(suppl_1), pp.S105-S112.

Dhingra, S. and Sampson, T., 2016. What kind of relationship with the EU is best for the UK economy post-Brexit?. LSE European Politics and Policy (EUROPP) Blog.

Dhingra, S., Ottaviano, G.I., Sampson, T. and Reenen, J.V., 2016. The consequences of Brexit for UK trade and living standards.

Gee, G., Rubini, L. and Trybus, M., 2016. Leaving the EU? The Legal Impact of ‘Brexit’on the United Kingdom. European Public Law, 22(1), pp.51-56.

Jafari, Y. and Britz, W., 2017. Brexit–an economy-wide Impact Assessment looking into trade, immigration, and Foreign Direct Investment. In 20th Annual Conference on Global Economic Analysis, June (pp. 7-9).

Matthews, K., 2016. The economic case for a Brexit. LSE European Politics and Policy (EUROPP) Blog.

Moloney, N., 2016. International financial governance, the EU, and Brexit: the ‘agencification’of EU financial governance and the implications. European Business Organization Law Review, 17(4), pp.451-480.

Mugarura, N. and Mugarura, N., 2016. The “EU Brexit” implication on a single banking license and other aspects of financial markets regulation in the UK. International Journal of Law and Management, 58(4), pp.468-483.

Ottaviano, G.I.P., Pessoa, J.P., Sampson, T. and Van Reenen, J., 2014. Brexit or Fixit? The trade and welfare effects of leaving the European Union.

Sahr, D., Sahr, D., Compton, M., Compton, M., Carr, A., Carr, A., Wilkes, G., Wilkes, G., Behrens, A. and Behrens, A., 2016. Brexit: what are the options for the financial services industry?. Journal of Investment Compliance, 17(4), pp.45-53.

Sampson, T., Dhingra, S., Ottaviano, G. and Van Reenen, J., 2016. Economists for Brexit: A Critique. BREXIT 2016, p.81.

Sheldon, I., 2016. Expected Macroeconomic Effects of a “Hard” Brexit (No. 252432). International Agricultural Trade Research Consortium.

Van Reenen, J., 2016. Brexit's Long-Run Effects on the UK Economy. Brookings Papers on Economic Activity, 2016(2), pp.367-383.

Wheeler, J., 2016. The Consequences Post Referendum for the UK Satellite and Space Industry. Air and Space Law, 41(6), pp.445-457.

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