The impact on the UK’s standing in the financial world after its departure from the European Union (EU) is still uncertain. Only time will tell how much damage will be inflicted on a sector that has traditionally been a huge driver of services revenue and employment for the UK.

Initial analysis suggests that the job exodus first predicted has not occurred, but there only seems to be one direction of travel now when financial institutions are making their long-term plans and investments. Assets transferred out of the UK, and especially the City of London as the heartland of UK’s financial center, have been substantial. Whether important financial venues of exchange and trade, and the clearing that provides their essential plumbing, can survive is not clear.

The UK government has, at best, appeared apathetic to the City’s predicament. It ignored the potential to use the finance sector as a bargaining chip at any stage in Brexit negotiations. Paris and Frankfurt have relished the opportunity this has offered; London’s dominance of finance in Europe has been long envied. Commentary suggests the government’s indifference to the City’s plight is political, while less cynical pundits claim it is because there is a feeling that the City of London is a grown up that can stand up for itself.

Was equivalence ever an option?

As Brexit retreats from vision, the prospect of compromise and reconciliation that was once alluded to in the fraught negotiations before the deal was done looks increasingly unlikely. This is especially the case when applied to the financial services market, where even an inch given by the European Union would strengthen the UK’s chance of maintaining its dominance of the financial markets outside of North America and Asia.

Equivalence was once mooted as a possibility for the UK after this most acrimonious divorce. This would have allowed it some level of continued access where the EU accepted that its laws, rules, and regulations offered similar enough protection, spirit, and effectiveness to allow for finance business to continue as before and for UK-based entities to ‘passport into’ the EU and continue to access customers and markets there.

This would have been of huge benefit to firms and institutions located only in the UK, as well as the UK itself, and would have avoided significant disruption. But the obvious question is what benefit this would have had for the EU, and the answer is a simple one. None.

Now that this stalemate has set fast, the UK is realizing it must shape its own financial future.

Reform starts here and now

The UK has begun the process of re-writing some of the cornerstone laws that it inherited from the EU. Arguably the most significant is its resolve for ‘twin tracks’ to separate the retail from the wholesale markets, recognizing the different characteristics of each, especially from a regulatory and protection perspective. Consumers and market professionals just do not need the same things.

This is the latest piece of a comprehensive overhaul and comes off the back of proposals put forward for new share listing and trade reporting rules, changes to insurance regulation, as well as guardrail removal in the opaque OTC professional markets or ‘dark pools’ where anonymized trading is favored.

The performance of UK-listed equities and its limping core stock market is overdue for change. Antiquated approaches to corporate governance have created a cadre of oversight by non-executives whose mantra promotes conservatism and stasis over profit and growth. In the same vein, an inability to list dual share classes is hugely unattractive to the founders of high-growth businesses such as technology firms. The UK’s inflexible immigration laws make thriving tech firms even more reluctant to make the UK their long-term home and investor seat.

The UK has begun the process of re-writing some of the cornerstone laws that it inherited from the EU.

Financial scandals in which retail investors have taken the biggest hits have continued to plague the UK regulatory environment. Recent ones include the London Capital & Finance minibond meltdown of 2019, and the collapse of Neil Woodford’s popular retail Equity Income fund during the same year. The UK has a poor track record in retail protection and has been dogged by numerous, widespread mis-selling abuses that have originated from some of the largest institutions, such as the Payment Protection Insurance (PPI) scandal, which has seen British banks and financial institutions paying out billions of pounds in compensation to customers who were wrongly sold PPI.

Patience has worn thin among government, politicians, and indeed the public. The current administration has therefore set out a zero-tolerance approach to life-affecting misconduct, which is a warning that retail operators must now acknowledge. Those that focus on fee income related to pensions and mortgage lending will have to demonstrate a higher duty of care when the regulators come to visit.

Professional markets gone but not forgotten

Billions of euros in share trading evaporated from London in January 2021 and washed up in Amsterdam. Suddenly a new competitor has emerged for the City other than the usual suspects further afield in New York, Hong Kong, and Singapore.

The UK’s Treasury and Financial Conduct Authority are trying to create a trading environment that differentiates it from the strictures of EU-regulated markets. The Treasury has pinned its hopes on specializing in markets that are open, green, and technologically superior. There is special interest in taking advantage of the considerable expertise and innovation that exists within the fintech sector in London and other parts of the UK.

Kay Swinburne, Chair of the International Regulatory Strategy Group and ex-Member of the European Parliament, has commented that the creation of tailored rules for professional investors would be an important differentiator. She also believes the EU will grant relief when equivalence ends after June 2022 with respect to the requirements to use regulated clearing houses in the EU.

Rishi Sunak, the UK Chancellor, began a drumbeat to usher in a fresh approach in July of 2021, and he has reiterated this message for regulatory change to help foster growth in speeches and comments to journalists.

His messaging is peppered with reference to regulatory ”agility” and ”dynamism” as it is broadly recognized that the UK’s future as a global financial marketplace is now in its own hands. The challenge is being able to balance the need to attract increased business and trade without sacrificing the high standards and protections that inspire confidence in investors and consumers.