James Fitzgerald is a financial journalist and chief reporter at Citywire.
As part of its “Brexit bonfire,” the British government is pushing to scrap all European Union financial regulations.
Though the country ceased to be part of the EU on January 1, 2021, due to the interwoven fabric of international financial services and the Brexit withdrawal agreement, the country’s financial firms are still subject to hundreds of the bloc’s regulations.
Talk of scrapping EU regulations began when then Chancellor Rishi Sunak announced his landmark financial services and markets bill in 2021, which was finally tabled in the United Kingdom’s parliament earlier this year. But if passed into legislation, not only will this leave investors and the public worse off, it could also lead to a lengthy period of instability and scandal.
This bill would give the British government the powers to rip up all existing EU financial regulations — including the Markets in Financial Instruments Directive, the Solvency II Directive for the insurance sector, as well as packaged retail investment and insurance products — and replace them with U.K.-made ones, or none at all.
And like Sunak, Liz Truss, who was sworn in as prime minister last week, has vowed to scrap every single EU regulation that still covers the U.K. financial sector by the end of 2023.
At the same time, Truss has also seesawed on whether to break apart the U.K. City Regulators — the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA), which regulate all the country’s financial firms, such as banks, investment houses and insurers — by sacking their leaders, mashing them together and starting again.
There are many problems with Truss’s ideas.
There are hundreds of EU-made regulations that U.K. financial firms have to consider, and scrapping them and creating new ones within the specified 18-month time frame is impossible — especially when the government and treasury are threatening to break up the City Regulators.
These EU regulations weren’t made overnight, and they cover critically important areas, such as consumer protection, governance, accountability and risk assessment. Ripping them up and rushing into creating new ones opens the door to a completely unregulated U.K. financial sector.
The FCA already doesn’t have the best reputation when things go pear-shaped, even if those in the wrong fall under the umbrella of U.K. and EU regulations. So, if the U.K. government were to give the watchdog a massive in tray and a list of regulations to conjure up in months, it could very well lead to a lengthy period of confusion and chaos.
Furthermore, the U.K. government — under both former Prime Minister Boris Johnson and now Truss — hasn’t been willing to sit at the table with EU representatives to decide on a measured way out of this mess.
In June, The European Affairs Committee and the British Lords Committee published a report on the U.K.-EU relationship in financial services. It wasn’t a good read.
The Lords Committee said the British government was “reluctant” to engage with the EU over financial services regulation, and it urged the government to weigh the benefits of regulation divergence against the costs of implementing new rules — which could also lead to barriers to cross-border trade in financial services.
But the word “reluctant” is a bit of an understatement. The current U.K. government, as new as it is, hasn’t yet engaged with the EU over its plan to tear up European regulations by the end of next year at all. Its own regulator has no idea what the plan is either — and has barely been consulted.
The U.K. Conservative government will go hard on anything European, as it firmly believes its 80-seat mandate in 2019 was won on Brexit and it’s what their supporters want. But fervent anti-EU rhetoric to please the masses is very different from ripping up rules and regulations that the U.K.’s financial system is legally bound by, and then replacing them with nothing, or something made up on the back of a napkin — which appears to be the current plan of attack by Truss and new Chancellor Kwasi Kwarteng.
There have been many promises made during the Conservative leadership campaign, some serious and many not. However, if Truss and Kwarteng are truly serious about replacing each and every existing EU regulation covering U.K. financial firms, it could open Pandora’s box.
More firms — over and above the ones that have already done so — could leave the U.K. for greener pastures in the EU and elsewhere, escaping new and confusing regulations and draining the already ailing British economy of funds and investment. U.K. consumers could also be left in the lurch, as the new rules — which will take years to enforce — may leave them vulnerable to a financial sector not unfamiliar with scandals.
Since the beginning, the entire Conservative leadership race has been a completely unserious affair, focused solely on the Tory membership. What is incredibly serious, however, is burning down the U.K. financial services sector — one of the few things still standing post-Brexit — to appease the right-wing, Brexit-obsessed core of the Tory party.