The old saying, the devil is in the detail, springs to mind when mulling over City minister Andrew Griffith and chancellor Jeremy Hunt’s package of self-proclaimed 80’s style revolutionary reforms to boost the City’s global competitiveness post Brexit.
There is just one small problem underpinning the recent political rhetoric: hardly any of the measures are Brexit-related. Those that are very much fall under the classic kick-things-into-the-long-grass ‘review’ category.
Take the headline measure – a consultation plan to increase the ringfencing threshold between retail and wholesale banking to £35bn from £25bn for smaller banks.
Ringfencing, which came into force post the 2008 financial crash, ensures core retail banking activity cannot be intertwined with wholesale investment banking activities.
When the UK was an EU member state it was an outlier on ringfencing – rightly going way beyond other member states on UK-specific measures. It had nothing to do with membership per se.
The proposed consultations on a UK retail central bank digital currency and bringing ESG ratings providers into the regulatory perimeter’ are also non-Brexit-related.
This begs the question, is there anything substantial within the ‘Edinburgh’ proposals that in any way shape or form can be attributed to our newfound Brexit freedoms?
Short selling
Well, the government will no doubt point towards the proposals around short selling.
Mainly deployed by hedge funds, short selling is a trading strategy that looks to profit when the price of an asset, like a stock or bond, falls.
The practice is currently regulated by the UK’s enactment of the EU short selling rules – which applies to ‘publicly traded’ securities, UK sovereign debt (gilts), and the use of credit default swaps.
However, the government’s review into short selling is limited to shares admitted to trading on exchanges, or multilateral trading facilities.
Crucially, it does not extend to short selling provisions for bonds like UK sovereign debt, or derivatives such as UK gilts or CDS products.
This is hardly going to cause big ripples in the City. One only has to look at the mixed performance of long/short funds to conclude that having the freedoms to more short sell equities is not exactly a prerequisite to automatic investing success.
In fact, most of the funds continue to have a decent amount of long, as opposed to short, exposure at the moment.
Then there are the more esoteric proposed changes. In addition to short selling, the government is reviewing existing EU legislation around MiFID II’s investment research rules.
Brought in back in 2018, research unbundling rules – which require brokers to separate payments for research and trade execution – have been lambasted for leading to a lack of competition, favouring larger institutions that can afford to subsidise their research departments.
Regardless of the specific policy outcomes the review conjures up, if the UK is not aligned to the same research rules as the EU, it is going to be much harder for brokers to work out and process accurate research invoicing and spend.
