City of London grapples with post-Brexit regulation

London fights for its future updates

A wave of UK government reforms designed to make the City of London more attractive after Brexit has already had one unintended consequence: finance industry executives are cancelling summer holidays to deal with the workload.

The sheer volume of consultations meant there was no time for a break this August, said a policy specialist at one large British asset manager. “It is overwhelming at the moment.”

For British politicians keen to take advantage of newfound freedoms and escape what they see as ill-fitting rules dictated by Brussels, the reforms are vital to ensuring London remains competitive as a leading financial hub.

But many big asset managers are sceptical of the rhetoric about cutting red tape, not least because they operate globally and want rules that allow them to continue to access markets with the least cost.

“We don’t see it as a competition between the UK and EU,” said Sheila Nicoll, head of public policy at Schroders, London’s largest listed asset manager. “There are opportunities and needs for the whole market to grow, so the two sides of the Channel are not competing against each other for business. We are competing together to grow the overall pot.”

Still, more than 70 per cent of those working in the UK asset management industry believe the City’s competitiveness has deteriorated since the 2016 referendum, and research from New Financial, a think-tank, this year found that insurance companies and asset managers have transferred more than £100bn in assets and funds from Britain to the EU in response to Brexit.

Bar chart of Number of companies reacting to UK leaving the EU (by sector) showing Asset managers have been the most responsive to Brexit

After months of informal consultation with the industry, the UK government has now published hundreds of pages of proposed reforms. They include overhauling the UK’s listing regime, changes to the EU-wide Mifid II financial markets rules, the Solvency II insurance regulations and the PRIIPS rules for how investment products are marketed to consumers.

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Alongside these, asset managers are grappling with changes to regulation for prospectuses, the potential introduction of a fund that can invest in long-term assets, various pension reforms, the Ron Kalifa review on making the UK more attractive for fintech companies and potential rules around sustainability.

“There is an awful lot of things going on at the same time,” said Rupert Krefting, head of corporate finance at M&G Investments. “It is good that the government is thinking about how to make London more competitive. We want London to succeed, especially post Brexit. But it is just thinking about all of the unforeseen consequences of all of these actions.”

While the government has been keen to push the idea that Brexit is driving the regulatory overhaul, Nicoll points out that some of these reviews were due to take place anyway.

Few in the City expected significant changes to the rules, not least because Britain was a driving force behind many of the original rules. “The UK really helped shape financial services regulation [in the EU]. The fingerprints of the UK expertise are all over Mifid II,” said one policy expert at a global asset manager.

But nearly eight months after the UK left the EU single market, many fund managers are coming around to the idea that the time is right to revisit some rules.

Kay Swinburne, KPMG’s vice-chair for financial services and a former MEP who was one of the architects of Mifid II, said: “There has been a sea change in the way they are talking about this in the past 12 months. The realisation has dropped that the EU regulations are not meant to be static.”

Asset managers watch closely to see if EU follows Mifid II review

A formal review of the landmark 2018 Mifid II rules, designed to promote investor protection and inject transparency into EU markets, was written into the original rules.

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The UK has already shown its hand, proposing to repeal rules around share trading in dark pools and revamping standards for holding large positions in commodities. Reporting requirements for bond trading are also set to be rewritten. Asset managers will be watching closely to see if the EU follows suit, particularly as dark pools and commodities position limits have provoked controversy in the past.

Kay Swinburne at KPMG said many asset managers felt that “dealers and others will have greater influence” on the rules. But she added that regulators are looking for asset managers to give their views. “They want the market to be efficient not just for financial intermediaries but for the investors. They want the market to be attractive for asset managers to do their business.”

Andrew Ninian, director for stewardship and corporate governance at the Investment Association, the trade body, said there was a growing acceptance that Brexit presented a “good opportunity for us to take a step back and ask what is right for us now”.

Nicoll said: “Before Brexit, time needed to be taken to persuade the other 27 countries, or spend time responding to others. Within the UK we all now have time to do a bit more blue-sky thinking.”

Nevertheless, after a decade of heavy regulation, many of the UK’s planned changes are relatively minor and technical, suggesting the government has heeded the City’s calls to avoid radical deregulation. That option could have shut them out of the EU and other markets, with authorities fearing it could weaken global standards.

“It is very much devil in the detail stuff about how much one would want to diverge,” said John Godfrey, corporate affairs director at Legal & General. “But there are some opportunities for divergence, such as on Solvency II.”

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Other asset managers fear the UK is pushing ahead with different reforms without thinking about how they will dovetail.

Krefting points out that the listing review conducted by Lord Jonathan Hill aims to make it easier for companies to list in London, but at the same time the UK is looking to introduce audit reforms that are “creating more bureaucracy for listed companies”.

Chart showing IPOs by London, EU and Amsterdam stock exchanges

Ninian said there was “more work to be done to join the dots” between various regulatory reforms. “We need to be making sure all these reviews are joined up and consistent and pulling in the right direction.”

While some policy experts working in the City have had to ditch their summer holidays, not everyone is convinced much will change after the regulatory reviews.

“We are talking about changing things around the edges rather than overhauling things completely,” said one policy specialist at an international asset manager.

Hill’s listings review faces some opposition

While asset managers want to make the UK more competitive, some are opposed to aspects of Lord Jonathan Hill’s UK listings review. For example there are concerns over the introduction of dual-class shares for premium listings and potential clashes with planned audit reforms.

“It is important we are getting the right companies to list in the UK,” said Andrew Ninian at the Investment Association. “But [the focus] needs to be wider. Are they just listing? Or are they operating and adding to the wider economy.”

Moreover Hill’s recommendations largely do not seek to repeal or modify EU rules. Sheila Nicoll at Schroders said many simply bring London into line with the rest of the world. “Our starting point is we do need to maintain the UK as an attractive place to list. There is a balance between applying very high standards and actually putting people off,” she said.


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