Brexit anniversary and its impact on banks

As the UK enters the tenth anniversary of its departure from the European Union, the financial services sector stands at a pivotal point. Brexit has prompted significant changes in regulatory frameworks, market access, and operational dynamics within the industry. Leonard Ng, Partner and Head of the UK/EU Financial Services Regulatory Group at Sidley, offers insights into how Brexit's effects have played out over the past decade.

Ng suggests that Brexit has, in many ways, resulted in a net-neutral impact on UK financial services. “Brexit has been, arguably, net neutral from a financial services perspective.” He elaborates on the duality of the situation, noting the considerable challenges that UK firms face when accessing EU markets. The termination of the single market passport, which provided seamless access to EU clients under several essential directives—such as the Capital Requirements Directive (CRD), Markets in Financial Instruments Directive (MiFID), and the Alternative Investment Fund Managers Directive (AIFMD)—has created significant hurdles for UK financial services firms.

“With the new restrictions on UK banks providing services to EU clients under CRD6, there is now notable friction for UK firms wanting to conduct business in the EU.” The consequences of this access restriction have manifested in various ways, including the need for UK firms to establish new entities within EU jurisdictions to maintain their market presence. The movement of professionals from the UK to the EU as firms restructure their operations has further complicated the landscape.

However, while these challenges are substantial, Ng highlights the UK’s newfound abilities to adapt and innovate in regulatory matters. “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.” This agility has become a hallmark of post-Brexit financial services, allowing the UK to tailor regulations that better suit its domestic market.

Ng points to the UK’s approach of adopting framework legislation, exemplified by recent developments such as the UK Securitisation Regulations 2024 and the upcoming UK Short Selling Regulations 2025. He observes that this framework allows the Financial Conduct Authority (FCA) to institute rules more rapidly than the traditional legislative processes, which can often be fraught with delays. “The FCA rule-making process is much quicker than the UK Parliamentary legislative process, and ever quicker than the EU Commission/Parliament/Council process for EU directives and regulations.”

This regulatory flexibility is poised to enhance the UK's competitive edge in the financial services domain, particularly as firms increasingly seek faster responses to market changes and demands. The UK's ability to swiftly deploy new regulations has become a crucial factor for firms assessing their operational strategies.

Furthermore, Ng outlines a significant long-term advantage for the UK—it retains its position as the primary entry point for US firms looking to access the European market. “What could tip the scale 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—this results in the UK being the beneficiary of new ideas and techniques from the US, for example in new areas such as private credit and private assets.”

This advantageous position not only fosters innovation but also allows UK firms to remain at the forefront of emerging trends in the financial services sector. As the industry navigates this continuously evolving landscape, the interplay between regulatory agility and market access will undoubtedly shape the trajectory of financial services in the UK.

As various stakeholders assess the implications of Brexit over the past decade, it is clear that the financial services sector has experienced a unique blend of challenges and opportunities. While the immediate effects of losing EU market access presented obstacles, the potential for enhanced competitiveness through regulatory flexibility and innovation has emerged as a silver lining.

Reflecting on the journey from Brexit to today, UK financial services have demonstrated resilience and adaptability, suggesting a dynamic future ahead. Bars set high by the evolving regulatory environment may yet further define the UK's positioning as a global financial hub in the years and decades to come. As the sector looks ahead, the crucial balancing of domestic regulatory strategies and international market relationships will remain central to its success.