Bogged down by massive changes to the regulatory regime over the past couple of years, UK IFAs could be forgiven for hoping that some of that burden will be lifted post-Brexit. Are they right to be optimistic?
The answer, as with much of Brexit, is a resounding – it all depends. But what it depends upon, say commentators, is the degree to which the UK remains aligned to EU rules for financial services.
Financial Inclusion Centre director Mick McAteer, who also sits on the Financial Services User Group advising the European Commission about consumer issues, says: “The question as to whether IFAs will get it easier after Brexit depends on what form of Brexit results from the negotiations.
“In my view, if there is a relatively soft Brexit, the impact on the UK financial sector shouldn’t be that great. However if there is a hard Brexit, then the revenues of the financial sector will be hit. There will be a push from the sector itself, to raise revenues and cut costs and the obvious way to cut costs is with deregulation.”
"A temporary permissions regime will allow 8,500 European Economic Area firms to continue to passport into the UK but a reciprocal arrangement allowing 6,000 UK firms to have EEA access has yet to be agreed."
Garry Heath, director general of UK trade body Libertatem, says: “Currently, we keep saluting whatever Brussels wants. In some cases, we invent what Brussels wants. In some cases Brussels invents what Brussels wants. I am hoping that in terms of advisers, eventually we have a lower key regulatory system.”
UK services after Brexit
Certainly, a lot more detail has been forthcoming from the Government and regulators over the summer. Many of this year’s political debates focused on a customs union or customs partnership something of great concern to manufacturing.
However since July, attention has turned to the much larger services sector including financial services.
The financial services chapter in the government white paper on the future relationship with the EU expressed the hope that the UK and the EU would provide access to each other’s markets “on the basis of equivalence of rules on an outcomes basis, across a broad scope of activities, and on the basis of predictable processes and governance arrangements.”
That, of course, sounds like a very close arrangement.
Yet advisers may also have noted that the EU has appeared to give this aspiration short shrift, although the Commission was then attacked by Foreign Secretary Jeremy Hunt who warned that ‘no deal’, especially on financial services, would hurt all sides.
One key paper entitled ‘HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act’ remains upbeat about the prospects for a substantial deal through a ‘Future Economic Partnership’.
It says: “While the government has every confidence that a deal will be reached and the implementation period will be in place, it has a duty to plan for all eventualities, including a ‘no deal’ scenario. The Government is clear that this scenario is in neither the UK’s nor the EU’s interest, and we do not anticipate it arising.
“To prepare for this unlikely eventuality, HM Treasury intends to use powers in the European Union (Withdrawal) Act (EUWA) to ensure that the UK continues to have a functioning financial services regulatory regime in all scenarios.”
FCA Brexit preparations
The FCA is also providing much more detail about its approach.
A speech from Nausicaa Delfas, executive director of International at the FCA continued the Treasury theme of hoping for a significant deal but preparing for ‘no deal’. The official FCA position is that firms should continue to work on the assumption that a deal will happen.
However, there are some signs of separation.
“The FCA has been working over the past months on identifying the various aspects that may need amending, and how these might be resolved. The most obvious examples are references to the Commission, or European Supervisory Authorities, which will have no jurisdiction here after Brexit.”
Advisers will note that a temporary permissions regime will allow 8,500 European Economic Area firms (from the EU, Norway, Iceland and Liechtenstein) to continue to passport into the UK but a reciprocal arrangement allowing 6,000 UK firms to have EEA access has yet to be agreed, though it is, once again, on the UK’s wish list.
The FCA also sounds as if it wishes to retain as close a relationship certainly on supervision and without explicitly saying so it sounds very much like maintenance of the Mifid II regime, which governs information sharing on transactions.
Near the conclusion of her speech, Delfas added: “At the supervisory level, we have deep relationships with our European counterparts, including information sharing – for example, in an average month we route around 250 million transaction reports to other National Competent Authorities in the EU.
“We cooperate on common challenges through Esma and the other European Supervisory Authorities and we work closely on policy issues – hence the common rulebooks we have today. Whilst we will no longer be a member of the EU, we are committed to keeping our relationships as close as possible.”
Labour vs Conservatives on financial regulation
Yet it still begs the question what on earth does this mean for advisers?
Will advisers be spared a future Mifid III or Priips II or even see existing regulations rolled back?
Some say this will depend on party politics.
“If there is a hard Brexit, and then a Labour Government, the financial services sector will still be very heavily regulated. There is absolutely no sign the Labour Party will ease up in regulation. If you have a hard Brexit then a Conservative government – you could conceive of it leading to a deregulation agenda,” says McAteer.
“It was the UK that drove a lot of the UK financial agenda, so the stuff that has actually come back to the UK was already very strongly influenced by the UK. There are obviously some cultural differences between consumers in different countries but the fundamentals are the same in terms of attitude to risk. In fact, some of those cultural differences are exaggerated. Consumers in the UK have the same need for basic protections as consumers in Italy or Germany.”
“Consumer groups are aware that if there is a hard Brexit, there will be a deregulatory agenda, and they will push back very strongly.”
EU capital adequacy rules for advisers
Heath says, perhaps surprisingly, that one the key issue for him is capital adequacy; he says the tough regime derives from the EU.
“We have discovered that capital adequacy is half of the total working capital of a typical IFA business. Half the money which could be used to expand your business is sitting in escrow. That is down to Europe, because in Europe, financial advice regulation is basically bank driven, not because it makes any sense but because banks do it, so advisers have to.
“They have foisted their version of the world on us. To disconnect us from that world, would be an extremely useful thing to do. Whether there is a political will to do it, in the current situation, I don’t know. There does seem to be a desire to replicate everything.”
“If you look at how businesses might be run, you could make a case to say ‘look, this is a stupid thing. It is stopping companies merging’. If sole traders want to be limited they can see capital adequacy rise by 100%. If we are out, I will be asking why are we saluting that particular flag?”