A no-deal outcome of negotiations between the European Union and the U.K. regarding the latter's exit from the bloc risks market fragmentation and financial instability, warns a House of Lords subcommittee.
In a report, "Brexit: the future of financial regulation and supervision," the House of Lords EU Financial Affairs Sub-Committee said the government must urgently clarify what outcome it wants from the next round of negotiations, and regarding transitional arrangements following the so-called Brexit. Otherwise, the committee warned that financial services firms will be forced to activate costly and potentially irreversible contingency plans.
The report outlined a number of other findings and recommendations. It said the U.K. "heavily influenced" international standards and EU law, which have shaped U.K. financial services regulation. The subcommittee said while leaving the EU will allow the U.K. to specify regulation for its domestic needs, it will be constrained by its commitment to international standards. The report recommended that the U.K. devote sufficient resources to engaging with international standards setters, continue to adhere to international standards and find a way to shape them in the future.
Regarding financial stability, the government should continue to advocate post-crisis reforms. "The government should itself resist the temptation to implement policies that would come at the cost of financial stability," said the report.
The subcommittee also recommended the government develop a comprehensive architecture for the future domestic regulation of financial services. "It is vital that Brexit, in transferring powers to domestic regulators, should not result in an unintended deficit in democratic scrutiny and accountability."
"The financial services sector needs greater clarity from the government about what it wants after Brexit, and it needs it now," said Kishwer Falkner, chairwoman of the EU Financial Affairs Sub-Committee, in a news release accompanying the report. "A transition period is meaningless without a destination."
"Brexit is an opportunity to tailor the regulatory regime to strengthen the U.K.'s financial services sector, but the U.K. must remain committed to the international standards put in place following the financial crisis and continue to shape them to ensure a robust regulatory regime," she added.
The report will be available on the subcommittee website.