Brexit Broadcast – Brexit update – Financial Services

Simon Lovegrove: Hello everyone and welcome to our latest financial services video on Brexit.

I am joined by Jonathan Herbst, our global head of financial services who has been working with a number of firms on Brexit.

Jonathan, to begin with what are you seeing in the market?

Jonathan Herbst: Two different things, so in the domestic world there is a lot of reauthorisation work for the banks, that is just really gathering pace, as everybody knows the PRA has effectively said, all the European banks have got to prepare for certainly branch reauthorisation and there is a question around subsidiarisation. So there is a lot of work in that, and that is one sort of slice.

The other piece is more general, it is the sort of what do we keep here, what do we move, what are the options and that is a very complicated analysis, partly because you have got so many European countries, so you have actually got to think about every member state, partly because you have got to think at a more fundamental level about how much you care about EU access, it may very well be that London is attractive for global reasons and actually there is a bigger play, there is the play with the US, there is a play with Asia, so I think those are the two main workstreams we are seeing at the moment.

Simon Lovegrove: And there has been a lot of discussion in the market regarding transitional periods. What do you see as the key legal concerns?

Jonathan Herbst: I think there are two things. One is actually more a practical concern which is just to make changes from a legal or practical perspective takes a long time, so you need time, that is just a fundamental reality.

When it comes to the more technical legal side, there are a number of issues. The first is certainty of knowing what will or will not apply to you on any particular date and the second, and there are a whole package of issues here, is around certainty of what the regime will look like in areas such as you know, who will adjudicate disputes, will it be the ECJ, will it be a new court, will it be the English courts, choice of law questions.  Put all of those together, contractual certainty, adjudication at a macro-political level but also micro-technical and contractual level, it is a very large legal set of issues and that is beginning, as people begin to focus on it, to make life quite complicated.

Simon Lovegrove: And what about the monetary policy model?

Jonathan Herbst: Well I think the point here, and this is a very novel way of looking at it, is one of the issues we have got is, we all know that the negotiations are going to take a while to conclude, that is understood, but the difficulty is when firms are planning, both from a practical and legal perspective, they sort of need to know what their risk curve looks like, what is the likelihood of a particular outcome?

If you think about monetary policy, what they have done or the concept of forward guidance to some degree as there have been ups and downs in that in the last decade, but the concept was at least give the market a sense of where things are moving. My personal view is that it will be very useful in this context.  Now obviously the government is not going to know until the negotiations have ended and we fully appreciate the need not to reveal the whole of your “hand” but I think that the problem for the market is if you don’t have some understanding of where things are moving, you by definition, in a risk analysis, have to take the very worst case and I think that is the challenge that we all have.

Simon Lovegrove: And turning now to the Withdrawal Bill, what do you see as the implications for financial services?

Jonathan Herbst: I think there are two things here. The first thing is just a practical point, the sheer scale of legislation that needs to be incorporated into English law is almost beyond belief.  If you think about it, it is all the regulations, in particular the directly applicable EU law, so there is just a practical point.

Beneath that, there are a number of technical legal points and I will just flag a couple of them. So the first one is how we deal with European legislation that is in force in technical terms, is in the Official Journal, but not yet implemented as at the day, at the relevant date.  So that is one example.  The second example is how you deal with what I call the whole gamut of “soft law”.  Think about ESMA guidance for example, ESMA Q&A.  What do you do with that, do we have regard for that, to that, do you not.  I think those are absolutely critical questions when you think about how complicated our financial services regime is, because it is not just a question of primary or even secondary legislation being incorporated, you have all of those issues, let alone and I know there has been much debate around future looking, what will ESMA do next year, after Brexit, I am talking about pre-Brexit material so there is quite a bit of thinking to be done on that.

Simon Lovegrove: And current ambiguity in EU law as well.

Jonathan Herbst: Well that is the other issue, you know to what extent you are going to have to deal with that. Now obviously in the Bill it talks about ECJ judgment up to the date of Brexit, being binding on its existing legislation but it is actually much more complicated than that and to the extent there is not an ECJ judgment, how are you going to approach those issues which ties back to what I was just talking about on, I take ESMA or the EBA as guidance or ECB Q&A, it is the same question on the CRR. 

I think in reality it seems very likely that the UK regulators will actually have regard to the European Q&As and the European level 3 and that seems extremely likely but not inevitable, we will need clarity on those questions. 

Simon Lovegrove: Jonathan, final question, international standards, do you think they will matter more or less post Brexit?

Jonathan Herbst: You know we know that with the election of the Trump administration, there was a lot of talk around international standards not being as important. My personal view is for the UK and it is a more general point, it is important that they remain in a significant role now there are two reasons for that. 

The first is a very obvious one that when you are talking about the whole enhanced equivalence model, you know to the extent that you have got an EU base for that, and that is fine, to the extent that you are talking about something equivalent you have to have something to base that on and the obvious place is international standards. So that is the first point.

The second point I think is despite the various forces pulling the world apart, the international standards that have been put in place post financial crisis are pretty well established and if you think about the G20 commitments, if you think about some of the other aspects, certainly regulatory capital and regulation and so I think one way or another they will continue to be very significant. The real question is will we see deepening of them and to take a practical example of that, you know, we know with IOSCO standards of various types, they are quite high level in places, will we see more or will we see less and I think that largely depends on political factors.

Simon Lovegrove: Thanks Jonathan. That concludes this financial services video.