All change: prepare for post-Brexit shakeup in financial regulations

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Financial institutions hoping for a smooth regulatory Brexit transition will have been dismayed by foreign secretary Dominic Raab insisting that UK alignment with EU laws post-Brexit is “not even on the negotiation table”. The current transition may have provided some stability for UK firms, but in January 2021 an unpredictable new era begins. 

For financial firms, it is difficult to picture what that era will look like: the fourth round of negotiations between London and Brussels ended last Friday with both sides admitting little progress had been made, with the services sector reportedly largely ignored so far. Josh Hardie, deputy director of the Confederation of British Industry (CBI), said that businesses are “unprepared for a dramatic change in trading relations with our biggest partner in just six months’ time.”

Figures from within the industry have voiced their concerns. Barney Reynolds, a lawyer specialising in financial regulation at Shearman and Sterling, told City A.M. it was “inevitable” that the EU would “want to change some of the details in its regulatory regime”. Six in 10 UK financial services workers fear the aftermath of Brexit will be the single biggest challenge the sector will have to face over the next 12 months. 67% said that increasing regulation was already a major challenge in their day-to-day activities. No one can claim to be in the dark about the storm on the horizon. 

Financial firms must now try to find stability within a contorting regulatory landscape. Bloomberg columnist Lionel Laurent writes that expecting anything other than “messy uncertainty” in UK/EU trade talks is “wishful thinking”. Messy uncertainty is indeed what firms will find themselves mired in, unless they can restructure their organisational and technological makeup to maximise their specialist knowledge.

The MiFID mystery 

Uncertainties abound. There is the question of whether UK firms will still need to comply with the standard trading practises of MiFiD II, an EU directive which harmonises investment regulations across EU markets with controls on research spending, record keeping and trading in stocks, derivatives and commodities. Will new and adjusted versions, such as the touted ‘MiFiD 2.5’ regulation, come into play? UK and EU fund managers are still at odds over the Mifid revamp, according to the Financial Times – so few conclusions can be drawn.

Bloomberg reports that officials in Brussels, Berlin and Paris are looking to amend the bloc’s Mifid II financial regulations by walking away from concessions made to the UK when the rules were originally drawn up. There is a danger of the UK financial services industry becoming a political football. “There is a risk that the Mifid review could be misused for political ends, which could ultimately, and regrettably, serve to frustrate access to EU markets by City firms,” Nathaniel Lalone, partner at Katten law firm in London who works on cross-border regulatory issues in the derivatives market, told Bloomberg.

As reported in the Telegraph, city insiders claim the depletion of analyst coverage – sparked by Mifid’s call for more transparent fees – has given rise to an exodus of star analysts, forcing big investment banks to hire “younger, cheaper analyst teams” and settle for poorer coverage.

The unpredictability factor affects legislators as well as businesses: national regulators imposed a last-minute delay to the MiFiD rules for the futures market, pushing back compliance until July 2020 – and blamed uncertainty around Brexit, according to the Financial Times.

Amidst a tide of uncertainty, one fact is abundantly clear: with tough times ahead, financial firms must find ways to capture and productise all of the in-house expertise that they process.

For a closer look at how machine intelligence can help businesses handle regulatory change by capturing and productising expertise, head to our eBook below on avoiding the looming brain drain in financial services. 

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