How will the Financial Conduct Authority adapt to the post-Brexit landscape? The City watchdog faces a number of challenges.
Here are some of those likely to be topping the in-tray of new boss Andrew Bailey.
First, the potential loss of London’s status as the passporting hub of Europe – the first-choice venue for international companies setting up subsidiaries in order to access lucrative EU markets – is likely to reduce the number of firms it regulates. As the FCA is funded by fees payable by those it regulates, an exodus from the City of London to Frankfurt or Dublin will reduce the pool of contributors, leading to reduced funding – or, potentially, higher levels of fees for those remaining.
Second, the bulk of the rules regulating the financial sector which the FCA enforces have their origins in the EU. In the short- to medium-term, nothing much will change. Existing regulations will of course remain in force pending any eventual UK withdrawal. In addition, the FCA has made it clear that firms should continue to prepare for the implementation of new legislation, most crucially MiFID II, an overhaul of the EU securities market due to take place in 2018. That’s because there is likely to be a short window of time between MiFID II entering into force and the UK exiting the EU. The concern is, however, how much influence the UK will in reality have upon the critical negotiations which are taking place between now and implementation.
Third, how effective will the FCA be in a climate of reduced co-operation with other EU regulators? The FCA has fostered positive working relationships with its sister EU agencies, leading to the effective sharing of information and the provision of mutual legal assistance. Much of that has been achieved under the auspices of legal frameworks from which the UK now looks likely to withdraw. Realistically, this co-operation is unlikely to cease, but the challenge will be to put in place parallel arrangements to allow for a similar level of co-operation to continue. The FCA must also seek to develop and strengthen links with non-EU agencies.
Fourth, how will the FCA support a reshaped City, focusing more on trading with non-EU partners? It has always played a key role in forming and implementing international financial regulation, and will continue to do so. Alongside other UK agencies, the FCA has been at the forefront of international as well as EU initiatives in financial services regulation since its inception. However, it may now need to start sprucing up its links with Chinese and Indian regulators as the City’s focus switches to trade with new partners in new territories.
Fifth, there is the issue of the FCA’s own staff. The organisation benefits from a rich diversity of talent from across the EU at every level. In common with most other large employers across the UK, the FCA will want to work hard to reassure and support its non-UK staff in order to avoid losing what is a very valuable resource.
Just as many of us in London were blindsided by the Leave vote, Andrew Bailey probably didn’t foresee the Brexit-shaped challenge ahead when he accepted his new brief. Yet this is likely to shape his tenure more than any other factor. The sheer level of uncertainty regarding the future regulatory landscape, in particular the eventual relationship which the UK will forge with the EU, presents immense challenges. The FCA will have to adapt, just as the City and financial services industry will do, but its ability to plan ahead is currently limited. Of course, the future will present opportunities for the FCA as well as threats. However, in the short term, the FCA’s priority will be to assist the Government and the UK's financial sector through what is likely to be a highly turbulent period. For an organisation that has hardly had time to bed down since its creation in 2013, it seems the prospect of “business as usual” might be more of an aspiration than a reality.
This first appeared on E Financial News 1/9