Why Britain Is Reluctant to Follow EU Regulation in Financial Services
The relationship between the United Kingdom (UK) and the European Union (EU) in terms of financial regulation has always been a topic of contention. Since the Brexit referendum five years ago, the UK has been particularly vocal about its reluctance to follow EU regulations in this sector. This article will delve into the reasons behind this reluctance and explore the implications for the UK's financial services industry.
The Start: A Pivotal Financial Regulation Role
Until the global financial crisis of 2008-2010, the UK had a significant influence on European financial regulation. Many of the EU's financial principles were based on the UK's tried-and-tested methods, including principle-based regulation, which is a stark contrast to the rule-based approach prevalent in many other countries. This historical context underscores the UK's importance in shaping the regulatory landscape.
Regulatory Parity Post-Brexit
Following the Brexit vote, there was no immediate change in the regulatory landscape. The UK's regulations remained largely in line with those of the EU. This made the transition somewhat seamless, but it also presented challenges concerning the future direction of these regulations. The UK government, like any other country, has reservations about committing to future EU regulations without knowing their specific content and implications.
Divergences: Key Areas of Disagreement
While the UK and the EU share many regulatory principles, there are several areas where their approaches have diverged. These areas include bonus limits, conduct regulation, and anti-money laundering (AML) measures.
Bonus Limits
The EU's implementation of bonus limits, which restrict bank bonuses to 1x or 2x salary with shareholder approval, is one area where the UK disagrees. Critics argue that this measure is disingenuous, as it does not apply universally to US and Swiss banks. Furthermore, the EU's selective application of these rules exacerbates workarounds, such as higher salaries or temporary salary increases.
Conduct Regulation
The UK also has issues with the EU's conduct regulation, particularly the criminalisation of supervisors who fail to supervise adequately. While the UK penalises management positions by barring individuals from holding regulatory positions or licenses and imposing fines, the EU takes a more severe approach, with penalties encompassing imprisonment and fines for directors who do not act in the best interests of shareholders.
Anti-Money Laundering and Anti-Tax Avoidance Directives
The UK has resisted implementing certain EU directives, primarily due to its Overseas Territories. The AMLD5 directive, which requires registers of beneficial interests for property companies and trusts, has been a contentious point. While the UK has begun to comply with these requirements on the mainland, implementing them in the UK's Overseas Territories (BOTs) faces significant obstacles.
UK Overseas Territories: A Unique Challenge
Several of the UK's Overseas Territories, like Bermuda, provide tax havens and nominee trusts, which are key sources of foreign earnings. However, these territories do not have the necessary registers of beneficial interests, making compliance with AMLD5 challenging. The UK has been reluctant to enforce these measures, as they would impact its Overseas Territories and the financial services industry.
As of now, the deadline for establishing a public ownership register in the BOTs has been pushed back to 2023, highlighting the ongoing challenges and political resistance to full compliance.
Conclusion
The relationship between the UK and the EU in financial regulation is complex, marked by both cooperation and discord. While the UK's regulatory framework currently mirrors that of the EU, the uncertainty surrounding future regulations and the unique challenges posed by the UK's Overseas Territories continue to drive the UK's reluctance to fully adhere to EU directives. As the UK navigates this landscape, the financial services industry will undoubtedly confront more challenges and opportunities in the years to come.