Banks face a storm of new regulation in the aftermath of the EU referendum – and they’re worryingly unprepared
June 24. The Brexit referendum result is in the books. Everyone wakes up dazed and wonders “what next?”
The City, in particular, will have work to do. Normal politics has taken a bit of a holiday but the bureaucratic processes steadily reshaping financial services regulation have not.
To give just a few examples: tax rules are changing and allegations of tax dodging pose a constant reputational risk. Requirements designed to prevent money laundering and other financial crime continue to evolve, often creating new, thorny issues like those surrounding “politically-exposed persons” (the rules were recently amended to try to prevent MPs’ families from being caught in the net). Payments regulations are starting to bed down and take effect, and are being clarified by the new regulator. The insurance industry needs to keep a close eye on what happens next with the Insurance Premium Tax.
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In Brussels, the Commission is continuing to develop its Capital Markets Union proposals. Some measures (for example, changes to Solvency II to encourage infrastructure investment) are moving quickly, while proposals to open up areas like crowdfunding to cross-border trade will be developed over the next year, and others might remain in the long grass (re-launching the fraught Common Consolidated Corporate Tax Base proposals).
Further afield, the most urgent priority (for the banking sector at least) is likely to be the proposals being dubbed “Basel IV”. Basel III is still being implemented, but changes are being made and they are creating more costs and uncertainty for the sector.
The new proposals would again raise capital requirements (by changing the ratios used to calculate how much needs to be held) and some institutions (like the already struggling investment banks) might be hit particularly hard. There are going to be new restrictions on how banks assess the riskiness of their loan books and account for operational risks. Although the recommendations have been scaled back, it has still been estimated they could add 40 per cent to the capital requirements for trading books, for example.
There is talk that the “fireworks” will start in the next couple of months, and worries that banks in Europe could face a further erosion of their competitive position relative to peers elsewhere in the world. The banks themselves are naturally aware of what is going on, as are maybe the Treasury and specialist regulators, but what about everyone else? Is the industry ready?
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It is one thing to formulate a technical position, or to start a slow process of gathering evidence on impacts. But in the coming months, the City risks a response which is too dependent on making its own case, on talking to the banking experts in and outside government, but not reaching the other political actors who matter.
With the sector’s reputation only starting to recover from the financial crisis, that would be a disaster, particularly if Wim Mijs of the European Banking Federation is right that this is a “political issue”. If the banks want to resist proposals they hate from the technocrats, they need allies.
Those allies might include other financial services affected, like those who rely on banks acting as market makers; non-financial corporations (particularly SMEs) who might lose access to funding; individual borrowers who might get a worse deal; issuers of debt who might be affected. The response should not just be pleading for mercy by the banks themselves.
My impression is that the sector in the UK and other EU member states knows that. Many politicians are out of the loop, though, occupied with the Brexit debate. You have to wonder if the groundwork of working out which stakeholders are affected (and the scale of the impacts) and then making sure they are aware of what is at stake will get done in time.
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There will be longer-term challenges for the City after the EU vote. The betting markets, at least, put the implied probability of us staying in at about 70 per cent. If they are right, there will be work to do rebuilding some rather rickety-looking bridges between the UK and other member states (not just in Brussels). And if the UK leaves, there will be the bigger task of working out how the City recasts its role.
In the immediate future, however, the task might be simpler, though just as challenging: making up for a lot of lost time, and particularly making sure that new rules don’t flood through without proper political scrutiny because attention was elsewhere. Basel IV is one, vivid example of what is at stake.