In this age of ‘fake news’, we’d like to start with some clarity and remove at least one misconception.
‘May you live in interesting times’ is not a Chinese curse and seems to have come from a British Liberal politician in late 19th century. An incorrect attribution doesn’t make it any less true, however.
In 2021 we all face the upheaval of COVID-19, remote working and reduced client confidence, coupled with the end of passporting into Europe for many companies. Perhaps change is on the way, however- the vaccine roll-out is ongoing and negotiations with the EU for the future of financial services has started.
We take a look at just four influences likely to have an impact on the financial services sector that are expected to feature in our newsfeeds – and compliance considerations - over the coming year. Obviously the future relationship with Europe is here, but we also wanted to consider the wider effect of the UK trying to further increase its influence on the global stage.
The Treasury consultation period comes to an end later in February, and although it will take a few months for the outcome to be published, it will have a bearing on how financial services will be regulated over the coming years. There will be a second period of consultation later in the year.
It can be expected that this new structure will bring considerable changes to the sector prior to the end of the regulator’s temporary transitional powers. Moving legislation to regulation and giving the FCA and PRA wider authority to manage financial services will not be easy and there will be changes for us all. Watch this space.
It’s important to remember that it was at the request of the UK Government that the last-minute Trade and Cooperation Agreement (TCA) did not include the financial services sector. It is only now that talks have started to address the issue of UK based firms losing passporting rights to the European market.
With a pledge to formulate a Memorandum of Understanding (MoU) between the EU and the UK by mid-March, many believe that this is too late, having already lost out to EU competitors. Even with the MoU, this is only the start of the negotiations and the much anticipated ‘equivalence’ proposal will only give firms a route back into Europe sometime in the future, if agreed.
How popular a return to aligned regulatory systems would be in the UK is debatable, particularly when the EU can withdraw equivalence determinations with third countries with only 30 days’ notice. Investor confidence in Switzerland has already been dented by exactly that unilateral action taken in the recent past.
It’s not all doom and gloom for the rest of 2021. HM Treasury has already announced plans to open up trading in Swiss shares, providing them with some of the opportunities that were recently denied them by the EU. Legislation is already being drafted to accommodate this.
It does not go anywhere near compensating for the loss of EU business (€6 billion of daily share trading lost in first week after Brexit), but it is start and demonstrates the commitment to look to other markets and grow these outside of Europe.
In a show of good faith last year, the UK Government has already allowed EU firms to continue operating here and has stated that they see this kind of gesture as key to maintaining London’s pre-eminent position in the field.
In a similar way, there are signs that a pragmatic approach to equivalence across financial services will be taken by the EU. The temporary equivalence relationship granted to UK clearing houses is a recognition of the strength and influence of the City and the many billions of Euros traded in derivative contracts each day.
With the UN Climate Change Conference heading to Glasgow at the end of the year, the Government’s new-found interest in all matters green has perhaps not had the coverage that they wanted (or deserved).
A lot of investors do want to support environmental projects, either from an altruistic sense of duty, or a revelation that there may be profit there down the line. Whatever the reason, if it does some good along the way, we won’t complain.
‘Green Gilts’ could become a reliable source of income in the near future for many, a sovereign bond issued by the Government, with the associated security and benefits that entails. It is planned that the capital raised will be used to fund employment and infrastructure that supports the environment and is positively combatting climate change.
Although Rishi Sunak has been low on detail regarding the product, and there are some doubts around just how ‘green’ the projects that the bonds finance will be, it is expected that there is a strong market for them and mirror their growth in other countries.
Even without the specifics, it would be a safe bet that these are up-and-running by the time the UN turns up North of the border.
2021 is a big year of change across the industry and no doubt there will be a few surprises along the way. Try to keep on top of things and although we can’t speak for the provenance of all Chinese proverbs, we can leave you with this gem:
“A Jewel is not polished without rubbing, nor a person perfected without trials.”
After the previous 12 months, we should all be a little bit closer to perfection.
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