The UK’s decision to leave the European Union is already having significant impacts on the UK. For example, now that it is no longer bound by the restrictions and regulations imposed by the EU, the UK is now free to pursue new trade relationships with other partners. The impact of Brexit has also been witnessed in the UK capital markets. In particular, Brexit has triggered significant changes to how securities issuance, marketing and capital market trading activities in the UK are regulated.
One of the regulatory changes for which the UK needs to brace is the emergence of a regulatory vacuum. Hohlmeier and Fahrholz (2018) joined forces to examine how this vacuum may occur. According to these scholars, as a member of the EU, the UK enjoyed various regulatory privileges that allowed for its capital markets to thrive 1 . Upon its exit from this union, the country will lose these privileges. According to Hohlmeier and Fahrholz (2018), unless the UK moves with speed to introduce new legislations and regulations to take the place of the EU rules, loopholes and vacuums could emerge.
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While the UK is the main country that will feel the adverse impacts of Brexit, EU is set to suffer as well. Specifically, experts predict that at the end of the Brexit transition period, the EU will face various regulatory changes that could compromise the strength and integrity of the union’s capital and financial markets. For instance, in his analysis of the implications of Brexit for the EU capital markets, Jones (2020) predicts that following the conclusion of Brexit, the EU will need to undergo massive regulatory re-alignments. As Jones (2020) reports, before Brexit, the EU had made tremendous strides in developing a harmonized regulatory framework that united its various members. 2 With UK’s exit, this framework has been weakened and questions have been raised whether the EU’s capital markets will thrive following the decision by one of the bloc’s most important members to leave. As the UK takes steps to fill the void left by the loss of the regulatory privileges that EU membership provided, the EU will also need to implement initiatives aimed at realigning its regulatory environment with its new UK-absent reality.
As is clear this far, Brexit has introduced challenges that could frustrate the efforts by the UK and EU to establish robust regulatory mechanisms. Both the UK and the EU have acknowledged that drastic regulatory changes are needed to insulate them against the adverse outcomes of Brexit. For example, experts believe that the UK and the EU will hold discussions about adopting harmonized regulations that help them to narrow the gap that Brexit has created. Wright (2016) is among these experts. He conducted a study to establish how European capital markets will be shaped by and respond to Brexit. Among the key observations that he made is that in a bid to lower the cost incurred in the capital markets, the EU and UK will work together to develop a coherent and harmonized framework through which their respective capital markets are regulated. 3 Therefore, while it has initially caused the capital market regulations of the EU and UK to diverge, Brexit could serve as the foundation for the establishment of closer ties and the implementation of a fresh and stronger approach to the regulation of these markets.
Among the main concerns that Brexit has generated is that it could cause the UK to become more isolated. These concerns are indeed valid. For example, Brexit has cost the UK access to the EU market and the country is now forced to identify other nations and markets with which it could partner. However, as Faull and Gleeson (2019) determined, Brexit could set the stage for the adoption of UK regulatory policies that enhance the competitiveness of the UK capital markets and facilitates global integration. 4 For instance, as established in the previous section, in the wake of the financial crisis, the UK government introduced a raft of stringent measures. While these measures are designed to protect the UK capital markets, they could also discourage investment. Therefore, in its bid to make the capital markets more attractive to investors and offset the loss of access to the EU market, the UK government could replace the existing regulations with more lenient policies.
Above, it has been anticipated that Brexit will sever the trading ties between the UK and EU. While this remains a possibility, it is important to recognize that the trade links between the two entities are nearly impossible to cut. For example, Cardi (2017) reported that London hosts as many as 75% of the capital market trading activities of the UK. 5 This fact indicates that the EU is heavily reliant on the UK. While a member of the EU, the UK was bound by regulations that required it to ensure that such processes as securities issuance, marketing and trading were compliant with EU rules. Brexit has eliminated the need for the UK to follow these regulations. However, it has not taken away the UK’s position as the hub of financial services and capital markets trading. The UK’s position raises question about how the country will secure the rights and interests of EU countries whose capital markets rely on the UK at a time when the EU is unable to impose its regulatory requirements on the UK. To resolve this question, it is clear that the UK must adopt new policies and regulations which prioritize the protection of EU interests. Mullineux (2019) suggested that such regulations will be necessary for the trading relationship between the UK and the EU to be protected. 6 Sowels (2016) is another scholar who advised the UK to move with speed in adopting regulations that ensure that the interests of the EU are not threatened. According to Sowels (2016), the global economy is becoming increasingly uncertain and the UK must spare no expense in securing its trading ties with the EU. 7 In the spirit of goodwill and cooperation, the UK needs to adopt laws that govern such processes as securities issuance, trading activities, and marketing.
The FCA recently issued guidelines in which it sheds light on how the capital markets and financial service providers will continue to operate within the EU and the implications of Brexit. According to the guidelines, firms may need to take advantage of favorable terms and exemptions offered by individual EU member countries. 8 Furthermore, the FCA warns companies that until the UK and the EU reach an agreement, the UK firms are essentially at the mercy of the EU. The sentiment of the FCA echoes the worries expressed by such scholars as Caporale et al. (2018) who also determined that Brexit had introduced uncertainty and fears into financial and capital markets 9 . In summary, during the transition period, the UK needs to submit to EU rules. At the end of this period, it should pursue collaboration with the EU.
In closing, Brexit is certainly one of the most disastrous moments in the history of the UK. Due to Brexit, the UK has become isolated and its economy faces a real risk of collapse. More importantly, Brexit has presented challenges for the country’s capital markets. These markets have been compelled to consider adopting new regulatory frameworks. For UK to maintain the competitiveness and relevance of the markets, it should join forces with EU in adopting harmonized regulations.
Bibliography
Journal Articles
Caporale, GM, Gil-Alana, L, and Trani, T, “Brexit and uncertainty in financial markets”, (2018) 6 International Journal of Financial Studies 1-9.
Cardi, M, “Brexit implications on capital market and international financial governance”, (2017) 13 Journal of Modern Accounting and Auditing , 385-93.
Hohlmeier, M, and Fahrholz, C, “The impact of Brexit on financial markets-taking stock”, (2018) 6 International Journal of Financial Studies 1-9.
Mullineux, A, ‘Brexit’: “‘The City’ and EU capital markets”, (2019) 16 International Economics and Economic Policy 17-25.
Sowels, N, “Brexit and UK-based financial services”, (2016) 22 French Journal of British Studies 1-17.
Web Sources
Faull, J, and Gleeson, S, “How is Brexit going to affect the EU's capital markets?”, World Economic Forum, 2019, < https://www.weforum.org/agenda/2019/07/what-does-brexit-have-in-store-for-europes-capital-markets/ > accessed June 20, 2020
Financial Conduct Authority, “Considerations for UK firms after the transition period”, 2020, < https://www.fca.org.uk/brexit/considerations-uk-firms-after-implementation-period > accessed June 20, 2020
Jones, H, “Brexit makes integrating EU capital markets more urgent, Commission says”, Reuters, 2020, < https://www.reuters.com/article/uk-britain-eu-capital-markets/brexit-makes-integrating-eu-capital-markets-more-urgent-commision-says-idUSKBN20E29W > accessed June 20, 2020
Wright, W, “The potential impact of Brexit on European capital markets. A qualitative survey of market participants.” New Financial, 2016, < https://newfinancial.org/wp-content/uploads/2016/04/The-potential-impact-of-Brexit-on-European-capital-markets-New-Financial-April-2016.pdf > accessed June 20, 2020
1 Michaela Hohlmeier and Christian Fahrholz, “The impact of Brexit on financial markets-taking stock”, (2018) 6 International Journal of Financial Studies 2.
2 Huw Jones, “Brexit makes integrating EU capital markets more urgent, Commission says”, Reuters, 2020, < https://www.reuters.com/article/uk-britain-eu-capital-markets/brexit-makes-integrating-eu-capital-markets-more-urgent-commision-says-idUSKBN20E29W > accessed June 20, 2020
3 William Wright, “The potential impact of Brexit on European capital markets. A qualitative survey of market participants.” New Financial, 2016, < https://newfinancial.org/wp-content/uploads/2016/04/The-potential-impact-of-Brexit-on-European-capital-markets-New-Financial-April-2016.pdf > accessed June 20, 2020
4 Jonathan Faull and Simon Gleeson, “How is Brexit going to affect the EU's capital markets?”, World Economic Forum, 2019, < https://www.weforum.org/agenda/2019/07/what-does-brexit-have-in-store-for-europes-capital-markets/ > accessed June 20, 2020
5 Mavie Cardi, “Brexit implications on capital market and international financial governance”,(2017) 13 Journal of Modern Accounting and Auditing , 385.
6 Andy Mullineux, ‘Brexit’: “‘The City’ and EU capital markets”,(2019) 16 International Economics and Economic Policy 18.
7 Nicholas Sowels, “Brexit and UK-based financial services”, (2016) 22 French Journal of British Studies 2.
8 Financial Conduct Authority, “Considerations for UK firms after the transition period”, 2020, < https://www.fca.org.uk/brexit/considerations-uk-firms-after-implementation-period > accessed June 20, 2020
9 Guglielmo Maria Caporale, Luis Gil-Alana and Tommaso Trani, “Brexit and uncertainty in financial markets”, , (2018) 6 International Journal of Financial Studies 2.
