Four Post-Brexit Regulatory Considerations by Fran Reed, FactSet Insight

The outcome of the UK’s referendum surprised London and global financial markets, making the long-term relationship between the UK and the EU highly uncertain. What factors should financial organizations impacted by the vote consider as they move forward?

MAR, MiFID II, and Short-Term Compliance Obligations

Despite the economic uncertainty, there is regulatory clarity for the present and immediate future.

The UK regulatory regime is deeply integrated within the larger EU regulatory complex, and for now, the financial regulatory certainty is that the Market Abuse Regulation (MAR) is in effect as of July 3 and MiFID II will go into effect in January 2018.

Banks and all EEA (European Economic Area) market participants have been diligently preparing — with new systems, processes, staff, and infrastructure — to comply with these unprecedented new regulatory requirements. Following the vote to leave, the Financial Conduct Authority (FCA) has made it very clear that the post-vote UK will still be subject to MAR and MiFID II.

In a statement released shortly after the vote to Brexit, the FCA said, “Much financial regulation currently applicable in the UK derives from EU legislation. This regulation will remain applicable until any changes are made, which will be a matter for Government and Parliament. Firms must continue to abide by their obligations under UK law, including those derived from EU law and continue with implementation plans for legislation that is still to come into effect. The longer term impacts of the decision to leave the EU on the overall regulatory framework for the UK will depend, in part, on the relationship that the UK seeks with the EU in the future. We will work closely with the Government as it confirms the arrangements for the UK’s future relationship with the EU.”

Notably, the interplay between MAR and MiFID II is intentional. Disclosing conflicts of interest in a transparent and objective manner under MAR for investment recommendations is complementary to the more targeted investment advice requirement under MiFID II with the additional standard of suitability and appropriateness.

Corporate Tax Rates

British Treasury Secretary, George Osborne has publicly promoted the possibility of reducing the corporation tax rate from 20% to 15%, as a stimulus for businesses that will encourage them to invest and expand in London.

The risk of “race to the bottom” corporate tax rates is they may encourage tax-avoidance strategies that create tax havens like the Cayman Islands. Attracting and maintaining foreign investments requires more than just a “business-friendly” environment through competitive corporate tax rates. Equally important, for business growth and development is stability, predictability, and certainty – both in economic and political terms.

Alternatives Corporate Tax Rate Individual Tax Rate Positives Negatives
London 20% 45%
  • Financial Capital
  • English Speaking
  • English Common Law
  • LIBOR
  • Cosmopolitan
  • Large City (8.5 million)
  • Gateway to Europe
  • Expensive
  • Uncertain Future
Dublin 12.5% 40%
  • Low Tax Rate
  • English Speaking
  • GMT
  • Small City (525k)
Paris 33% 45%
  •  Financial Center
  • Cosmopolitan
  • Large City (2.2 million)
  • Higher Taxes
  • Restrictive Employment Laws
Frankfurt 29.8% 45%
  • ECB Headquarters
  • Less Expensive Vs London
  • Small City (700k)

Bond Yield Uncertainty

Uncertainty is bad for business, bad for markets, bad for investors, bad for politics, and bad for regulations. In this case, uncertainty surrounding the execution of UK’s departure from the EU, shifting corporate tax policies, and a variety of additional pressures have come together in the wake of the Brexit vote.

Global government bond yields are significantly lower, with some in negative territory. Despite aggressive central bank policies cutting short-term lending rates to zero and pumping trillions in cash into bond markets, there remains persistent soft global growth, low inflation, and concerns on market instability. A danger of negative yields is that they can turn bonds into speculative vehicles, rather than buy and hold income-producing assets.

The effect on safe haven markets has a ripple effect on peripheral markets by pushing overall rates lower as investors look for yield in longer maturities, emerging markets, and riskier corporate debt like high yield and distressed debt.

Brexit, Regulatory Considerations

Financial Regulatory Reform

The modern financial regulatory regime is extraordinarily complex, constantly changing, and cross-jurisdictional. Banks, brokerages, asset managers, and funds today require unbiased outsourced risk and regulatory reporting solutions and services. Regulatory focus on transparency and greater accountability requires firms to take a more strategic, integrated approach to compliance.

Financial regulators are under intense pressure to create effective regulations that strike the right balance between firm and effective oversight versus overly burdensome requirements. Lessons learned from the past with a sharp eye to the future, regulators search for black swans in their attempt to prevent the next financial crisis. Given the high stakes, merely regulating products, participants, and markets is not enough. Modern regulators, shouldering the heavy burden of protecting the entirety of the global financial system, must work together in setting criteria, across jurisdictions to integrate best practices and the highest supervisory standards.

Critical to crafting effective reform is open dialogue among all stakeholders, including supervised-constituents for their depth of expertise and unique perspectives — at every step along the process. Regulators acting in a transparent, considered, and inclusive manner are good for markets, investors, constituents, and the ultimate quality of the regulation. Cross-jurisdictional collaboration and integration of standards, reporting, governance, and recourse is critical for supervising systemic risk.

Preparing to Move Forward

In the long term, UK regulators will likely find a way to harmonize financial regulations and standards with the larger EU regime, given critical importance the EU is to the UK economy. However, the prevailing winds of uncertainty still require organizations impacted by Brexit to consider new tools to bolster historic workflows, ensure compliance with new regulation, and insulate themselves from disruptive world events.

Firms and banks, for example, need a flexible integrated multi-asset class solution for research management which creates better trading decisions and smarter investment recommendations that leads to more consistent trading revenues over time. Such tools should cover a variety of asset classes including fixed income, equity, FX, commodities, and derivatives. Consideration must also be give to the security of the CRM and management reporting options used , as the configuration of taxonomy that allow organizations to comply with any potential regulatory updates or client requests.

Implementing an integrated research management solution can provide enhanced data governance like this and allow those impacted by the implementation of MAR and MiFID II to make better trading decisions, smarter investment recommendations, and increase profit potential.

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