The FCA Attempt to correct the post-Brexit Narrative

We have spoken here in Financial Regulation Matters of the potential for a regulatory race-to-the-bottom in the post-Brexit era. With the U.K. choosing to go out into the economic landscape on its own, the potential for a weakening of regulatory protection to encourage foreign trade and investment is tremendous, and hardly a surprise. Yet, the FCA, as one of the fundamental elements in the regulatory framework that governs the U.K., has no option but to refute any suggestion that the framework will be weakened as a result of Brexit. In this post, we shall examine their latest insistence on the back of what were very telling declarations by leading British politicians.

Speaking on a recent visit to Tokyo, the Economic Secretary John Glen told his audience that ‘we will do whatever it takes to keep the UK as a global hub for financial services and to maintain the City of London as an asset for Europe’. This follows on from Theresa May telling the UN Summit in New York recently that the post-Brexit Britain would be ‘low tax’ and ‘unequivocally pro-business’. Glen continued this pro-business narrative by stating that the British Government is determined to provide ‘one of the lowest, if not the lowest corporation tax environment’. There is a clear narrative being advanced by the Government, and of course it is no surprise – it is clear that the Conservative-led government will take this approach as we had towards the uncertain time of the post-Brexit era.

This official rejection of a move towards a race-to-the-bottom scenario has been prevalent since the decision of the British electorate. However, with a arguable change in approach as we near the projected date of withdrawal, the Chairman of the FCA has this week made the point that ‘the FCA does not see the UK’s withdrawal from the European Union as an opportunity to join a race to the bottom in regulatory standards’. Charles Randall continued by stating that ‘strong global standards also reinforce the competitiveness of the UK financial services sector’. This sentiment has been repeated in the business media, with one author going as far to say that Brexit brings with it the potential to actually outdo the EU in terms of financial regulation, and that ‘the UK should compete post-Brexit… with tough, fair and proportionate rules based on evidence’. Interestingly, this week’s statements from Randall are not his first on the matter, and the fact that there is a fear that, globally, a race to the bottom is very much underway (think of the Trump Administration’s protectionist approach) is potentially underpinning Randall’s need to show a progressive aim for the regulator.

However, there is one massive piece of evidence that suggests the FCA will take another route, and that is its dealings with Saudi Aramco. The FCA’s changing of listing rules, designed to enhance the UK’s chances of hosting the Saudi Arabian colossus’ stock market floatation, is clear evidence of assisting with the push envisioned by the government – ‘unequivocally pro-business’. Despite concerted opposition to the FCA’s actions, the regulator admitting meeting Saudi Aramco months before the rule change, and now a reported crackdown on any domestic opposition to the plans to float the company, the FCA is maintaining its course to fulfil the Government’s agenda, and not the one it portrays for itself. Is this acceptable, that one of the most important financial regulators essentially does the Government’s bidding? Perhaps, but really if this the case, then surely advancing the same message is the correct course of action.

Regulators in this current climate has a difficult job in maintaining any sense of authority. With the post-Crisis era, in terms of financial penalties at least, coming to a close, financial regulators are entering a phase where, essentially, they cannot be seen to be ‘getting in the way’. Amnesia is alive and well in the current climate (one thinks of the dancing Theresa May declaring that ‘austerity is over’), and as such there will be many calls to allow business to flourish. The problem with that, and this is something we have discussed many times, is that we have not had the chance to have our version of the ‘quiet period’. The post-Depression era was followed by WWII, and whilst it is obvious that nobody would want a repeat of those horrors, it did essentially force the ‘quiet period’ upon the world; in this generation, there is an attempt to move straight past this necessary post-shock period and straight into the next Bull era. Regrettably, the actions of financial regulators inform us that they see the responsibility to consider future systemic movements as the responsibility of politicians. Perhaps many would argue that this is democracy at work (as the regulators are not elected), but the real question is should a financial regulator be merely an extension of the sitting government?

Keywords – Brexit, Financial Regulation, Business, FCA, race to the bottom, @finregmatters