UK faces unintended consequences of post-Brexit financial regulation

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A year after Britain left the EU, Britain’s big banks face a scenario that was far from the vision of the architects of Brexit: their European rivals may soon be able to lend cheaper to British businesses than themselves.

EU banks are getting a boost due to the bloc’s decision to break away from some of the last parts of Basel III, the globally agreed capital rules. This will allow EU banks to use less capital when lending to companies without a credit rating, reducing their lending costs. Prior to Brexit, UK banks would have benefited from the same relief.

“It’s a big deal,” said a senior executive at a major British bank. ” There is a risk. . . that the BNP can lend to a bunch of better quality UK businesses at cheaper rates than UK banks. . . Open markets only work if everyone plays by the global rules.

Corporate lending is just one of the areas of possible post-Brexit divergence that the City of London is watching with concern in 2022 as the EU and UK advance new financial regulations at a pace not seen since. the immediate aftermath of the 2007-2008 crisis.

Ongoing work in both jurisdictions includes drawing up plans to overhaul market regulations, detailing how the UK will implement the latest Basel banking accords and creating new digital assets and anti-corruption regimes. money laundering in the EU.

“The divergence will not come from rolling back historical rules, it will come from the different approach to rule making,” said Simon Gleeson, lawyer and partner at Clifford Chance. The banks say different rules in the EU and the UK will increase administrative costs for businesses trying to comply with two regimes.

One of the main areas of concern for financial leaders, industry groups and advisers is the latest set of global banking rules agreed in Basel in 2017. The EU released hundreds of pages for implementation in November. UK banks have to wait until the second half of 2022 to see if the Bank of England will give banks the same relief on business and corporate loans. A person familiar with the plans said the BoE’s Prudential Regulator would consult with the industry and take their concerns into account.

Still, UK banks and their advisers are bracing for tougher treatment of capital generally than their EU counterparts, with particular concerns around corporate lending.

“Basel’s new treatment of business loans is problematic because most businesses outside the United States do not have credit ratings, which will make loans to them more capital intensive for banks. [applying the Basel rules]said Simon Hills, director of prudential regulation at UK banking lobby group UK Finance.

“If the PRA does not take the same approach as the EU to unrated companies, then EU banks may be able to lend cheaply to UK companies, emptying their traditional focus when it comes to UK business lending,” he added.

The British bank executive nevertheless has sympathy for the competing interests that the PRA is trying to balance.

The authority has a new secondary mandate to consider growth and competitiveness, which would prompt the regulator to grant UK banks the same relief as the EU, to preserve a level playing field. But prudential and political concerns weigh heavily against this course of action.

‘The UK won’t follow 100%’ on aid to unrated companies, says a veteran UK financial regulation expert, who has called the EU’s approach ‘unsound’ from the point of view of banking policy. “Politically, the UK could never say that we are following the EU and not the global standard,” they added.

As London continues to allow banks to sell to the UK from the EU even as Brussels erects borders, banks say EU lenders will be able to do business in the UK cheaper than their British counterparts. The situation could drag on until 2032, when EU aid is due to expire.

“The UK regulator is still deciding on [whether to extend the same relief]Hills said. He hopes the UK will ensure a “level playing field” for its banks and those based in the bloc.

London has yet to announce whether it will follow the EU in delaying implementation of the entire Basel package until 2025, leaving UK banks with less certainty than their EU counterparts.

They will also have to adapt to the potential uncertainty of having a national regulator that can constantly refine the rules. “One of the good things that EU membership has done for the UK is it solved the problem we had before, which was generally known as a ‘frenzied regulator,'” Gleeson said. .

In the EU, regulations take a long time to pin down, are usually very detailed and become permanent in complex primary law once they have been approved. But the upside to this approach is that “they can’t afford to change it”, said a senior UK bank politician who is lukewarm about the promise of “more nimble” UK policy.

In other areas, however, the EU is taking a more restrictive approach than London, which could give the UK a competitive advantage.

One of them concerns digital assets, where a package from Brussels, the markets for crypto-assets, or MICA, presents proposals that, among other things, would significantly limit banks’ transactions with cryptocurrencies. If the EU agrees to these plans, it is “probably” a competitive advantage for the UK, Gleeson believes.

The EU is also creating a single anti-money laundering authority, the AMLA, which, according to Chris Woolard, former acting director of the UK’s Financial Conduct Authority, “could make the market more efficient European. . . or it could be some other body that banks and others have to deal with”. Money laundering falls under various regulatory bodies in the UK, including the FCA, HMRC, National Crime Agency and the Serious Fraud Office.

Trade is another area of ​​reform. The UK has already introduced new niche measures, including a special listing regime for companies wishing to raise funds to make opportunistic investments, called SPAC, and announced a range of other reforms to make listing in London more attractive.

Market regulation is another potential area of ​​divergence as the EU revises its landmark Mifid II package and the UK advances its review of wholesale markets.

A senior lobbyist at a major international bank said UK and European regulators could improve market efficiency and cut costs, “even if that means different rules in different places”.

“Once it was decided that equivalence was off the cards, a pipe dream, there was no longer any sense of consistency and convergence,” he said. “Now the approach is to get the best possible deal in each jurisdiction.”

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