24 June 2016 was a sober Friday in the City of London, as lawyers, bankers and the public alike digested the news that the UK had voted to leave the European Union.
A decade on, on the anniversary of the vote result, partners share their views on how the City has fared in the aftermath, and whether the UK has found its place in a much-changed Europe.
No clear path yet
With Brexit raising expectations of a radical reform of the UK’s regulatory landscape and a ‘bonfire of red tape’, regulatory lawyers have spent the subsequent decade seeking to minimise disruption for clients, while also identifying potential opportunities created by a more flexible regime.
Ten years on, Bob Penn (pictured), global head of financial services regulation at A&O Shearman, reflects on the scale of the challenge.
‘It’s been difficult, complicated and quite painful at times, when the City has been trying to determine what kind of financial sector we want. There’s no clear path yet.’
‘We’re still at an early stage in determining what the UK financial market regulation will look like, which becomes more pressing every year, and political instability has made that more challenging.’
As Sidley’s head of UK/EU financial services regulatory group Leonard Ng puts it, much of the post-2020 period has involved ensuring that ‘we actually had properly functioning laws’, a laborious process of translating EU statutes.
Taking back control
As the slogan went, much of the touted benefit of Brexit was to ‘take back control’ of laws and regulations, and to an extent, the UK has been able to do that, with the Financial Conduct Authority (FCA) taking responsibility for maintaining and updating a range of technical standards that were previously set at EU level.
Sidley’s Ng says this has been a major benefit: ‘We now have a very flexible system, and any changes can be made incredibly quickly.’
Opportunities for the UK to forge its own path have included reform of the regulatory framework for alternative investment fund managers, with a consultation to overhaul the UK Alternative Investment Fund Managers regime expected to make the UK more competitive.
‘I think it is likely that we’re going to see these regulations change materially,’ Ng says. ‘It is going to be very different to the EU, and much more competitive.’
Gains outweighed by losses
Despite the benefits of such post-Brexit reforms, several partners spoken to for this article said that the vast amount of work involved in untangling the UK from EU regulations has offset the upside.
‘In cases where the UK has been able to move away from EU rules,’ says William Reddie, a regulatory partner in HFW’s insurance team, ‘there have been both positive and negative effects. But, at the moment, the positives of opportunity don’t necessarily outweigh the negatives of time spent.’
Since Brexit, the UK has been able to sign new trade agreements with numerous countries including Australia, India and New Zealand, and negotiate terms with others – but these have their own drawbacks.
‘There have been more new free trade agreements than predicted,’ Ross Denton, a senior counsel at Akin with three decades of international trade experience, explains, ‘but these, of course, now create an impediment to rejoining the EU. The economic gains from them are far outweighed by the overall loss.’
Sidley’s Ng takes a more optimistic view. ‘Brexit has been, arguably, net neutral from a financial services perspective,’ he says. ‘On one hand, it has led to significant friction for UK firms wanting to do business in the EU. On the other hand, however, the UK has shown that it can and will deviate from the EU on financial services regulation and be much more competitive.’
A smaller and humbler City of London?
The extent to which the UK’s split has affected its standing with Europe is up for debate, and divides opinion among partners.
For Penn, one specific downside is clear. ‘Before Brexit, global firms would put their European bridgehead in London without a second thought. But after Brexit, we lost the overwhelming reason for expanding financial institutions to choose the UK.
‘If you’re the next Revolut, and you’re looking at your options, it’s the UK with 70 million people versus at least 450 million in the EU – we are no longer the obvious choice,’ he says.
As he puts it: ‘It’s a smaller and humbler City of London than it would have been.’
However, Sidley’s Ng argues that the UK is still the go-to option for US investors. ‘The reality is that the UK has always been much closer to the US than Europe has traditionally,’ he says. ‘When US firms come to Europe, they set up in the UK before they think of anything else.’
‘We all thought that Frankfurt or Milan might be major winners,’ he adds, ‘but no one jurisdiction is significantly stronger than it was 10 years ago.’
‘What could tip the scales towards the UK in the long run is that it remains the case that the UK is still the main entry point to Europe for US firms.’
A dangerous game
With Keir Starmer’s resignation this week, the UK is set for yet another change of leadership, with all eyes on the new Prime Minister’s position on relations with the EU.
For Katy Colton (pictured), head of the politics and law group at Mishcon de Reya, a government led by Andy Burnham could lead to a strengthening of ties with Europe, though any formal re-entry to the EU is ‘realistically off the cards’, as Akin’s Denton explains.
‘We have the EU-UK Trade and Cooperation Agreement, so we would be looking at intermediate levels – for example, accessing the customs union, or some form of “associate” status. This might be possible, because the electorate would not see this as “rejoining”, and we wouldn’t have to bear the heavy political costs.
‘But it is also politically risky at the moment,’ Denton adds. ‘While public sentiment has moved against Brexit, there appears to be a weariness about the process of leaving, and it will take longer for the electorate to want to bear the cost and go through the full process of rejoining.’
On that point, Colton says the next general election will be a huge factor. ‘If the country swings further to the right after the next election, it will see us take a big step away from Europe. But in the context of our politics, one is playing a dangerous game trying to predict anything.’
