Financial Services as a sector has seen its fair share of uncertainty in recent years. There is little doubt that Brexit will see an increase in this. The sector is highly regulated with the most significant changes in recent years driven at an EU level. This includes key regulations around how businesses must conduct their own operations and, more importantly for many, how they can distribute products. The regulatory framework can be area specific (with CRD IV for banking, Solvency II for insurance, AIFMD and UCITS for funds) and the wider reaching market rules including MiFID II and EMIR).
There are markets that thrive on uncertainty – funds that generate returns and attract assets by maximising the opportunities arising from events with unknown consequences. For the majority of UK regulated companies however, this level of uncertainty on how they will do business in the future is unprecedented and unwelcome. The implications of a “leave” vote for financial services, particularly the regulatory framework, post BREXIT and the corresponding effects for Ireland are difficult to forecast.
Brexit is likely to impact in a number of core areas for the financial services sector:
The current regulatory framework is largely driven by the EU and has seen increasing range and complexity in recent years. Operating outside of this could mean that the UK choose to develop their own regulatory regime without EU restrictions and requirements. This could result in a more streamlined regime but the acceptability to a wider market is in question. Where UK companies have other EU regulated entities it could also result in them having to manage a range of regulatory requirements.
Changes to market access
Currently, financial services companies avail of passporting to allow them to market services across the EU from regulation in their home jurisdiction through a freedom of services or freedom of establishment basis. Leaving the EU could result in the removal of these passporting rights and the loss of EU branded products restricting UK financial institutions and funds from key markets. This could apply both to services sold into and from the UK.
The implications from this could include a need to redomicile investment product, to establish new operations regulated in an EU jurisdiction or a need to replace UK service providers with EU regulated companies.
Where investors and users of financial services have restriction that bring requirements for EU products and services this may drive change for UK companies rather than risking the exclusion of key markets.
There are no immediate changes arising from the Brexit vote but it will be key for companies to monitor developments and ensure that they are fully briefed on the impact of decisions as they are made to ensure that they are ready for the new market reality. Now is the time to update contingency plans and to establish how they can adapt locations and operations to maximise opportunity and operational efficiency. Companies will hesitate to make large investment decisions on their operations until there is more certainty.
Ireland is well placed to benefit from Brexit. We have centres of excellence in financial services, an understanding of how UK markets operate and can offer a practical alternative. We are not the only EU country to be looking at this opportunity – now more than ever we will need a proactive approach from the government, the Regulator and the industry to support regulated entities through Brexit.