Summer Edition - Financial Services

In theory, divergence is not a one-way street. There are some areas of regulation where greater convergence globally is on the table, particularly around the ESG agenda and the regulation of new technologies, including those provided through outsourcing. Financial services businesses will hope that relations will thaw between the UK and EU around regulation and that coordination mechanisms between these jurisdictions, and others, will improve. This would allow the leaders of those firms the clarity to help them make strategic decisions.

However, the reality is that in the medium-term, divergence will be the name of the game in financial services regulation. Business leaders and managers need to be cognisant of how divergent approaches may impact on their firms and include this as a factor in strategic planning and enterprise risk management.

A key consideration is that divergence is likely to lead to further duplication and increased costs and a higher administrative and legal burden, which is likely to be an anti-competitive source of friction for firms operating across the two jurisdictions. As such, business leaders operating in both the UK and EU, will need to monitor regulatory developments, understand the implications for their own firm’s strategy, and, where appropriate, engage with policymakers should they feel that the impact of regulatory change risks becoming disproportionate and is impacting the bottom line.

Many firms have a good understanding of the way regulation is formed in Brussels and in the EU supervisory agencies in Paris and Frankfurt. However, the UK represents a new and generally unknown challenge. As the UK’s Treasury and regulators evolve their post-Brexit roles, business leaders will need to learn how to understand and engage with a whole new process and set of stakeholders to minimise the risks policy changes present to their business models.

Leaders of international firms, or those with international aspirations, should also take into account that divergence between the two jurisdictions could also lead to higher costs in terms of accessing capital and should consider this variable when it comes to strategic planning and future capital investment decisions.

Glossary

CCP – Central Counterparty

CSRD - Corporate Sustainability Reporting Directive

DORA – Digital Operational Resilience Act

ELTIF – European Long Term Investment Fund

ESAP – European Single Access Point

ESG – Environment, Social and Governance

ESMA – European Securities and Markets Authority

EU – European Union

LTAF – Long Term Investment Funds

MICA – Markets in Crypto Assets

MIFID II - Markets in Financial Instruments Directive

PRIIPS – Packaged Retail Insurance and Investment Products

SFDR - Sustainable Finance Disclosure Regulation

TCFD – Task Force on Climate Related Financial Disclosures

UK – United Kingdom