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08 Juli 2016

Brexit – What does it mean for my regulatory change programme?

The world’s financial services firms are pushing regulators and politicians for answers, so they can plan their future British operations after the UK’s vote to leave the EU, while continuing to implement and oversee a multiplicity of regulatory initiatives. The biggest unknown is whether UK-based banks will lose their right to “passports” that let them work with the 27 EU countries. 

So what would this mean for UK domiciled firms if they had no access to passporting rights in a post-Brexit model? And how would this affect ‘in-flight’ regulatory change initiatives?
One thing is certain, financial services firms will need to rapidly ensure that their regulatory change initiatives and risk management capabilities are aligned with the medium-term regulatory, financial markets and economic impacts, while at the same time determining and implementing the changes necessary to keep access to the EU markets.
In order to stay ahead of potential changes, firms need to quickly get on top of immediate BAU remediation strategies. This includes formulating early contingency plans around potential changes to legal entity strategies, location strategies, booking models and the enhancement of existing legal entities within the EU. These items need to be resolved first before they consider the impact on BAU or change initiatives.
It is possible that Brexit could result in a de-harmonisation of regulation within Europe if the UK work towards their own interpretation and implementation of the Financial Action Task Force (FATF) Recommendations. The UK government may decide to implement compliance-relevant laws that are different and stricter than a joint EU proposition where regulation is designed to be harmonious and applicable in all Member States. Recent examples include the UK pushing back to the EU on banker bonus caps and the fact that the UK has a more rigorous stress testing and structural reform framework than our EU counterparts. Overall, this could mean tougher regulation and lonestanding policies that could align the UK closer with the US regulatory environment.
However, it is more likely that the UK will implement a regulatory regime that reaches equivalence to both the EU and the US, giving UK banks the most access to the other 27 Member States, either directly or through EU domiciled subsidiaries. Failure to achieve equivalence would mean that other EU countries, and indeed the US, would view UK banks as too risky and less stringent than their own.
Whatever the arrangements negotiated, the first port of call for all regulatory change programmes should be to review the compliance strategy decisions for each individual ‘in flight’ regulation in light of the broader strategic direction and decisions of the bank. Following this, regulatory change programmes should be enhanced to incorporate the flexibility to adjust to new legal entities and different business models for distribution within the EU. Change management and governance processes will need to be on-point to effectively manage a re-prioritisation of scope and resources, clear communications of impacts across the business will be required ( as interpretations and understanding of likely changes evolve these should be cascaded across the organisation) and Legal and Compliance functions should define an interpretation of what Brexit is likely to mean to existing business models and operations (this position should be considered immediately and also when planning change from 2017 and beyond).
Whilst the final landscape is someway off, it should be possible to make informed assumptions about the likely changes now rather than implementing ‘big-bang’ changes upon final confirmation of the impacts.