James C. Scoville
Brexit, Trump and Basel IV: Implications for Financial Services
This past April, Debevoise & Plimpton hosted an exclusive, BritishAmerican Business program titled “Regulatory Developments: Brexit, Trump and Basel IV” in London. The purpose of the discussion was to examine and consider the impact these recent global developments could have on the financial services industry and member organizations’ businesses.
Brexit and Passporting
Passporting allows London to act as a gateway to the European Union (EU) market for many financial services businesses; UK-authorized businesses can establish continental branches, and market and provide their products and services in other EU states without having to obtain a licence from a local regulator. It is becoming increasingly clear that the UK will not be joining the EEA after Brexit, and the passporting rights will therefore likely be lost. This would profoundly affect how UK-authorized businesses conduct their business in the EU, and would also affect EEA firms accessing the UK market. Firms should be (and indeed are) already developing contingency plans to retain passporting benefits. Considering that “equivalence” provisions in applicable law – which would allow UK-authorized firms to operate in the EU through “third country” regimes – provide some benefits, they are not a complete alternative as they generally avoid the need to operate through a local establishment.
Recent EU statements on equivalence have not been promising. Whilst equivalence and passporting may make economic sense for both sides, Brexit is viewed as a political action and may receive a political response.
Prior to the election of President Donald Trump, United States officials largely argued in favor of the so-called “Basel IV” to operational risk and internal ratings-based approach to credit risk – the EU shares the same sentiment. The new executive order by President Trump on financial regulation has cast doubt on whether Basel IV will ever be adopted in any form. The market expects a final decision by June 2017.
These are some of the important issues facing the financial service industry today. Both the results from the Brexit vote and the election of President Trump both represent potential major changes in the way global financial services businesses are operated, regulated and structured – at the very least, it is unlikely to be business as usual for the financial services industry. As Brexit negotiations begin, and the US President settles into his office, firms need to remain vigilant and prepared to adapt to any changes as they occur in the EU, UK and US.