With arise of global financial crisis (GFC), large number of countries are moving towards stability by reinforcing financial regulation. Nevertheless significant, this might be at outflow of comprehensive progress, particularly in underprivileged countries. Due to the lacking of efficient regulation, financial systems reach at the state of instability, provoking crisis that can result in devastation for real economy (Mayntz, 2015).
According to Davies and Green (2013) the biggest financial centre in European Union (EU) is contained by UK. The global market of finance pivoted on London City is distinct within European Union, enchanting a broader variety of international banks and other suppliers of financial services. Whereas, large number of foreign institutes have presence in UK to take part in financial market of UK, many financial institutes which are not a part of European Union also involve UK as a centre to access markets and clients across European Union (Dhingra et al, 2015). Large number of EU organisations also preserves branch existences in London. Brexit, in any form, would influence the industry of financial services: the degree of that influence would rely on activities put in position during middle period which would require to takes place while discussions occur between EU remainder countries and the UK, and how far away those discussions protect access for the organisations of UK to European Union clients (Lang, 2014). This essay is on analysis of impact of Brexit on financial regulations of UK and EU.
Since the time of financial crisis, a noticeable maximization has been seen in the wish to harmonize regulations of financial services at international level. The basic rationale of regulations of financial services is to endorse efficient and effective resource allocation and capital accumulation while preserving the soundness and protection of financial institutes that gather collections from individuals. Supervisory professionals gain these aims by striking several restrictions on the exposure of risk, reporting and accounting procedures, and actions of financial institutes. This makes sure the occurrence of some bankruptcies and that the organised economic impacts of bankruptcy are confined (Crafts, 2016).
According to Moloney (2016) seen from an unconventional viewpoint, existence of financial regulations is to gain stability between depositor and shareholder interests. Lacking of appropriate regulation, financial institutes would be liable to believe extremely risky situations since anticipated profits to shareholders maximize with immense risk however their utmost losses remain restricted to their equity. On the other hand, debt-holders and depositors would be against such approach since they stand a lot to lose but very little to gain from immense risk. Simultaneously, it is not gainful or even sensible to look forward to depositors to notify themselves regarding the situation of shareholders along with risk report of financial institute. This irregularity in reimbursement to lack of information and the risk between shareholders and depositors exhibits that supervision is not required to shelter the concern of general public. Unsuitable regulation will result in lifting the rate of financial intermediation exclusive of offering a resultant minimization in risk involved in financial institutes (Mugarura, 2016).
Dagnis et al (2016) stated that the influence on trade of UK along with Europe will base on the link between EU and UK after Brexit. In such conditions – either FTA-dependent link or Swiss model – regulatory divergence that add more value to the price of trade tend to enhance with time, destroying the position of UK and trade volumes in supply chains of Europe. The customers and the business will bear the costs. The UK is the champion of the market, but away from EU it will not be an effective advocate of liberty. Critics of UK often make complains regarding regulatory excesses of EU, but regulations intent to develop the level field. A part of euroscepticism is that through Brexit, the UK will not any effect over regulations of EU.
According to one estimate, national regulation is more cost effective as compared to EU regulation. Criticism has been done on processes of EU for being hard to affect and opaque, specifically for SMEs. However, under conditions of Brexit, the UK needs to select between being extracted from the market or adoption of rules (Booth et al, 2015). This dilemma is not avoided by Swiss or Norwegian. Common regulations are important for market in services and goods, which is the priority of UK. The scenario of FTA is different. It provides more flexibility to UK to select like whether to adopt the regulations of EU. TTIP depicts that biggest prize for FTAs is convergence (Boulanger and Philippidis, 2015).
Brexit may influence the cost of services, liquidity and location in Europe in case when it undermines the competitive position of London. For households and business, it can prove to be expensive. Major operations are performed by European banks in London which are much costly to relocate. Only some of the financial centres may get advantages through it (Badinger and Nitsch, 2015). The UK has been implemented much into the financial systems of Europe. UK claims on EU15 are $880bn with much credit to organizations and households, but also to interbank lending and governments. In total bank exposure of Europe is even higher. For Europe it can prove to be costly to relocate the banking activity (Swinbank, 2016).
Gee et al (2016) stated that London is not only the financial centre of Europe; it is the global centre having position in product areas. Global position of London can get damaged if more of the European business will migrate. There is a risk, that some of the businesses, specifically mobile operation like derivatives may leave Europe. The likely beneficiaries in the EU are Dublin, Amsterdam, Frankfurt and Paris. The benefits of London cannot be replicated overnight. Ecosystem of London facilitates the market infrastructure, legal services, skilled staff and financial services. Competition among them got out of barriers for trading with London could be costly and disruptive. Due to less liquidity, poorer products and higher charges, business in Europe can lose. For instance, organizations of Europe find it costly and easy to raise capital in London, which recently give a one-stop shop.
Brexit tend to alter the balance of regulatory debates. The UK tends to take risk-averse and interventionist approach for regulation. The UK ignores interventions which are encouraged through politics. Initiatives like Financial Transactions Tax and banker bonuses will get an easy way without UK in EU. For the financial regulatory law of UK, EU is the major source. Current parliamentary research of UK suggests that EU-linked law holds one-sixth of the statute books of UK (Booth et al, 2015). The figure does not involve the deposit, the regulations of EU take direct influence in every country (involving UK) in contrast to directives of EU which needs to be transposed or implemented by each country in local law; regulations of EU will be applied in the UK post-Brexit. Along with this, it would be important for UK to reconfirm or renegotiate EU free-trade deals that will not be inherited by UK. The UK will be required to legislate the voluminous laws which have their foundations in EU and will fill regulatory gaps in the legislation of UK (Moloney, 2016). It would be open for UK to incorporate regulations of EU into law of UK. This can be the easiest action course, given the breadth and volume of problems which requires to be dealt by the government of UK in vote event to leave the EU. According to this, in contrast with the influence that UK leaving EEA has on passporting, the regulatory environment of UK for organizations of financial services may not alter in Brexit event only. Along with it, alterations to the UK regime are predicted to be made and that is why it is eventually favorable for the organizations of UK (Swinbank, 2016).
According to Lang (2014) the receipts through structural funds are leaned towards regions where living standards are not much for the average of EU. Getting out of the EU implies that more expenditure in these areas will be needed at least for transitional period. Due to the fact, that receipts from budget of EU are declining, it is natural to predict that the requirement for funding is also declining with the passage of time and its phasing can be done at faster rate. On the other hand, funds for sector of agriculture are increasing and will need more support while exiting from EU.
Along with this; it is not entire EU funding that is presented in the budget calculations. This is because of the reason that EU only looks over the expenditure to regional and national authorities as the receipts of public sector are in the budget of EU. Public-private partnerships, public institutions, NGOs, and UK businesses also receive some of the grants because of projects. The EU provides 20% of the funding of UK grants for facilitating scientific researches. Therefore; the UK is also required to enhanced research funding for maintaining the scientific research dependent upon Brexit. In accordance with Commission’s Financial Transparency System, the UK got £1.228 billion from EU in funding that are not the component. Extracting the funding from total contribution of UK, the total contribution is now £8.579 billion (Mugarura, 2016).
Another sector where there is re-regulation of EU and the one which is most significant for trade is the product regulation and business harmonization. It covers the identification of qualifications and skills and introduces the less regulatory standards. The cost for exporters is decreased, because of the reason that they do not comply with the rulebooks. In accordance with this product, the EU has introduced the less number of standards for large number of goods of general interest like environmental protection, customer protection and health (Gee et al, 2016). In accordance with this, one can even argue that organizations of UK are consistent with standards of EU and products of UK will be approved for the market of EU, if standards or end product will not change. However, this holds true only, if civil servants of UK concludes that it is quite easy to continue to enforce and apply regulations of EU. If products and business are deregulated, organizations of UK can choose not to live up according to the standards of EU for being more cost-efficient. Particularly, new organizations that are only targeting the market of UK, will tend to select more cost efficient products and methods. This will let the organization to be more successful, though it will also result into fall in exports, as some will be de-motivated from increasing to EU as they need to adapt at first. Also, an organization can even target to deliver to the market of UK. Suddenly, the second organization will not be capable of exporting products to countries of EU. Therefore, in the sector of product regulation and business regulation, the UK will have to continue to implement the guidance from EU or will suffer from the decrement in exports (Davies and Green, 2013).
On contrary to this, it is stated that only few products are subjected towards harmonization of EU, therefore only less number of business will be influenced. They would be subject to legislation for all other sectors. Being an EU member, UK organizations are extracted from legislation of domestic products. At the start, it was assumed that removing tariff barrier is enough for ensuring the trade flow, though very soon it became quite clear that there is existence of non-tariff barriers in the Single Market (Mayntz, 2015).
An effective and stable financial system has a possibly strong impact on the economic growth of the country not the least due to the reason that it may have an influence on the degree of capital creation, competence in the provision of capital between hostile assertions, and as well as the self-belief consumers have in unrighteous of financial system. The effectiveness and stability of the system has both demand-side and supply-side impacts on economy. Sequentially, a coherent and well-composed regulatory regime plays a significant role towards stability and effectiveness of financial system. The UK still makes more of the contribution to the budget of EU than what it gets in return. However, certain regions and sectors can also suffer from losses upon exiting the Union, and the net beneficiaries of EU have also their centre in UK, it will be most important to overcome the differences. The analysis has shown that there is a significant impact of Brexit on balance of regulatory debates, cost of services and liquidity of financial institutions operating in UK.
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