December 27, 2016 By FTI Consulting
Attempts to secure access to Europe’s single market will likely dominate political discussions on financial services in 2017. This headline issue, albeit essential, betrays the many nuanced positions – for investment banking, asset management, and insurance there are different types of passport, and for hedge funds the issue may not be as much of a priority. Some aspects of the sector are also looking at the potential opportunities, particularly on the capital requirements constraints currently in place for investment banks. While industries such as automotive have been able to gain reassurance from this government over priority issues, it is more electorally contentious for the financial services industry to be given preferential treatment by policy makers in light of the financial crash. This has resulted in significant behind the scenes discussions as government tries to determine a position that will appease an industry that is so diverse, and that contributes so significantly to UK economic performance.
We’re going to see the profile of trade bodies increase, with much limelight being taken by the BBA and European Financial Services Chairman’s Advisory Committee (EFSCAC). EFSCAC is setting itself out as undertaking more of the ‘thinking’ behind what the UK’s financial services framework should look like post-Brexit, with the BBA and City UK doing more of the campaigning – but we should not forget the need for government to look to bodies such as the ABI and BVCA for collective input post the tabling of Article 50.
Contingency plans will continually be updated by firms throughout 2017 and those headquartered in London are keeping their ears close to the ground on political developments in France and Germany as alternative bases, with the City’s political interest in Ireland more acute now than it has been for a while. Much has been made of the banks’ intentions to ensure that a transitional agreement is in place for a period of time, and the noise made by Lloyd’s of London in potentially establishing a European base is dominating insurance orientated dialogue. But the role of private equity and other non-bank finance in influencing the thinking of UK government and other EU nation states (especially because of the establishment of the Capital Markets Union) should not be overlooked – and may come to the fore more in 2017 than the initial loud noises made by the banking sector.
A school of thought gaining preferential traction with industry insiders is that of Barnabas Reynolds, who authored A Blueprint for Brexit: The Future of Global Financial Services and Markets in the UK for Politeia. Rather than looking at the issue with a sorting hat of ‘passporting or ‘no passporting’, he suggests alternative options that would best suit the financial services industry. One is an ‘Expanded Equivalence’ model, which would extend the equivalence arrangements now in place for third countries e.g. the US or Australia, to access the single market. The other is a ‘Financial Centre’ model, which would allow the UK to establish a market-friendly regulatory framework, in accordance with global standards and the best global and UK practices – thereby the UK hanging its coat on its ability to shape global financial regulation. It remains to be seen whether either of these models, or indeed another, will gain cut through with Chancellor Philip Hammond who openly sits on the soft side of Brexit.
On a domestic point of view, pre-empting 2019 implementation of the bank ring-fence will continue – with retail banks looking to appear much less London centric than the previous universal models ahead of 2019 legislative deadline. Challenger banks will continue to campaign for the 8% profit surcharge to be more fairly re-weighted to allow increased competition with established players.
The CMA’s recommendation of open API standard for banking will likely encourage established players not to rest on their laurels and it will be a massive opportunity for fintech providers and new platforms to encroach on this space. On the fintech side, access to the single market will of course be a priority as they look to expand their businesses, but the ability of UK fintechs to pull top talent from Europe is arguably just as important. The FCA and UK government may give increased support to the regulatory sandbox, and ensure it becomes more accessible, to ensure that London is still appeals as a fintech hub despite Brexit.
Responsible capitalism has been championed by the Theresa May government via a green paper and we will likely see further proposals from government on this in 2017 – with implications for boards and executive pay, issues which the financial services industry will look to get ahead of. We are also likely to see increased parliamentary scrutiny of EU directives impacting financial services sector, a Solvency II inquiry is already underway by the Treasury Select Committee, expect more on the likes of MiFID or AIFMD equivalence.
The recent unexpected consultation on spread betting indicates an FCA looking to actively intervene in markets. Soon after the FCA announced the consultation on spread betting, regulators in Germany did the same with Cypriot regultors pre-empting the FCA. This prevalence of sudden, public and unannounced intervention by the FCA could become more frequent in 2017 – as could the coordination with financial regulators on specific issues in other markets. The publication of the FCA’s final report and remedies into the asset management market study is also likely carry significant sway in 2017, particularly if the CMA undertakes a subsequent investigation.