Sunday, 5 February 2017

Theresa May’s Brexit Legacy Predicament: Short-Term vs Long-Term

This short blog post discusses the delicate predicament that British PM Theresa May is faced with in light of MP’s recent support for the triggering of Article 50[1]. Whilst it may be obvious that any political leader will have to balance a number of competing interests, the job facing Theresa May is arguably more important. The decision of the British people to leave the European Union has forced the Government to focus on productivity and growth in preparation of leaving the bloc, as can be seen by the many Trade excursions taken by Mrs May in recent weeks. Yet, that position is one that can directly induce a lowering of standards, or a so-called ‘race-to-the-bottom, that may have an extremely damaging effect on the health of the British society (and potentially further afield due to the interconnectedness of modern society).

This theoretical notion of the introduction of new levels of ‘regulatory arbitrage’ – where institutions will move between jurisdictions to receive a more favourable regulatory environment – and the potential of its effect upon the U.K. is, arguably, no longer theoretical. In regards to regulatory arbitrage and its potential effect, Cornelius Hurley, a former US regulator, mentioned in the Financial Times that ‘…it really boils down to regulatory arbitrage – and the competition among financial regulators to [either] the most credible or the most lenient’[2]. Elsewhere, Professors Pierre Boyer and Hubert Kempf have noted that ‘competition induced by regulatory arbitrage in a financially open economy invalidates the use of some instruments and consequently critically hampers the regulatory capacity of these authorities[3]. This development will be borne out of the U.K.’s inability to act on a United front, regulatory speaking, once it leaves the European Union - Professor Niamh Moloney offers an insightful understanding as to the many issues that may face the U.K. upon leaving the bloc, including the issue of regulatory competition[4].

Yet, it is contested here that things need not go that far – the threat is more than enough. Multiple news outlets have been reporting that the U.K. is facing a financial-services exodus once the separation is complete[5], and it is this threat alone that will force Theresa May’s hand – for a Prime Minister facing the prospect of determining the course that the country, with its fragile economy, will take, the option of reducing regulatory standards to both keep and attract business is a decision that she will arguably not hesitate in taking.

However, this short-termism – induced by the result, and arguably the narrative, of the referendum - is extraordinarily dangerous. To expose the British economy, in the first instance, to the venal and self-interested culture that has enveloped the modern financial sector, is surely a recipe for disaster, particularly so soon after the Financial Crisis of 2007/08. The reliance of the British economy upon the financial services sector only serves to add to the understanding that the future of the U.K. will be determined by the ethics of the financial sector if regulatory standards are to drop after separation – we have seen, time and time again, that to rely upon the financial sector to promote the interests of anyone or anything other than their own interests is delusional and reduces our ability to guard against the inevitable attack upon society. Unfortunately, it is usually the case that at the time when we must be vigilant, we are inattentive and trusting, a paradox based on belief and hope – it is that concoction that creates the breeding ground for great damage.

[1] Tom Batchelor ‘Article 50 Brexit Vote: Full list of MPs who backed Theresa May starting official EU Negotiations – and those who voted against’ [2017] The Independent (Feb 2)
[2] Alex Baker, Jim Brunsden, and Michael Stothard ‘Brexit – an existential problem for London and Paris’ [2016] Financial Times (Feb 19)
[3] Pierre Boyer and Hubert Kempf ‘Regulatory Arbitrage and the Efficiency of Banking Regulation’ [2016] Oxford Business Law Blog (June 15)
[4] Niamh Moloney ‘Financial Services, the EU, and Brexit: An Uncertain Future for the City?’ [2016] 17 German Law Journal.
[5] Zlata Rodionova ‘Brexit: Banks in ‘advanced talks’ over mass move to Paris, says French Regulator’ [2016] The Independent (Dec 8); Daniel Boffey ‘Brexit: leading banks set to pull out of UK early next year’ [2016] The Guardian (Oct 22)

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