Financial services will enjoy a Brexit boom if the regulators let us take advantage of the opportunities it presents

Financial services will enjoy a Brexit boom if the regulators let us take advantage of the opportunities it presents

It’s easy to forget that it’s not just politicians who disagree about the opportunities and challenges posed by Britain’s imminent departure from the European Union. Brexit is the UK’s chance to amplify its global financial influence, but many in the industry are allowing the risks to distract them from the opportunities.

The chief executive of the Financial Conduct Authority (FCA), Andrew Bailey, recently set out his vision for “the future of financial conduct regulation”, in which he described how the UK could begin to evolve an “outcome-focused” and “lower burden” approach to financial regulation after leaving the European Union, while still maintaining “equivalence” with other jurisdictions across the world.

This seems to be a very sensible approach. EU financial regulation is stifling – this might be a cliché; it is also true. Some might say that the EU’s recently revamped Markets in Financial Instruments Directive (MiFID II) represents regulation at its most ambitious. It also represents regulation at its most intrusive and inflexible. Different jurisdictions with different financial services industries should be differently regulated.

This might sound obvious to most, but clearly not to everyone. There are many voices in the regulatory community pushing back against the idea that lighter regulation for the UK after Brexit should be a priority.

Their logic is that regulatory bodies should focus on ensuring that individual banks remain in robust condition, in line with the overall financial system – especially in light of having just moved past the decade anniversary of the global financial crisis.

However, this demonstrates a fundamental misunderstanding of the purpose and function of financial regulation. The function of regulation is to protect consumers and ensure a level playing field for competition; but without innovation, consumers will look to other jurisdictions that offer better returns. Profit and growth are inherent features of the financial services industry – without sufficient incentive there will be no industry to regulate.

As Britain prepares to depart from the European Union, its preparation should not prioritise caution, but innovation. But many betray an opposite attitude to this, arguing that the financial crash taught us that competitive incentives should not shape decisions about regulatory policies. To the contrary, competition is the only means by which the UK will prosper outside the regulatory tightropes of the European Union.

Such views are further confused for implying that lighter regulation would inhibit – rather than embolden – enterprise and start-ups, which are precisely the kind of companies the UK needs to ensure remain firmly ensconced in the blossoming tech hubs of its major cities. Moreover, the falling value of the British pound that is likely to be a temporary consequence of Brexit will encourage investment all round – especially in these small- to medium-sized firms which challenge established business models and offer new services to consumers. Now is their time to flirt with the idea of international expansion, and to treat Brexit as the catalyst they’ve been waiting for to enable them to take the next step. But they will only do so if the environment is right.

Comparative advantage is the basic economic concept that countries should specialise in the things they are good at. Britain has become the world’s centre for financial services for good reason, and due in no small part to its more laissez-faire attitude to financial regulation since the Financial Services Act 1986 and the ensuing ‘Big Bang’ in financial services. This attitude is itself a reflection of its legal and political deposition, which favours rules being set based on precedent rather than decrees issued from top-down – in this case from Brussels.

This is exactly the kind of spirit that Andrew Bailey sought to capture in his speech, when he said that “left to our own devices… the UK regulatory system would evolve somewhat differently” to that of the European Union, prioritising “principles” derived from “practical experience”, over “detailed rules that can tend to become overly set in stone”.

On a more political level, this question of course goes to the heart of what Brexit means and should be. Will the UK ultimately be a rule maker or a rule taker – having voted to ‘take back control’ of its money and laws? On a financial level, this question goes to the heart of what the UK (and of course London especially) is about – the freedom to innovate with a view to growing and serving the global market, unhindered by an unaccountable bureaucracy whose purpose is to oversee just one of many continents with which the UK does business.

With Brexit, Britain’s financial services industry has the opportunity to become the very best version of itself. It can’t blame Brussels anymore if it chooses not to take it.