In our first article we explained the Capital Markets Union (‘CMU’) and highlighted some of the immediate issues raised by Brexit. We now turn our attention to the future and the likelihood of the UK's continued participation in the CMU.
Whether the CMU project in its current form remains a political priority post-Brexit remains to be seen. CMU aside however, given how interconnected and interdependent the UK and EU capital markets have become what will remain a political imperative (for both the UK and EU) is to ensure that these capital markets continue to function effectively and harmoniously in the post-Brexit world. The CMU itself is not a single piece of legislation or regulation, rather a framework for proposed reform to remove existing barriers to a harmonised European capital market one by one. As such, whether CMU continues or not isn’t binary and there are certain aspects of CMU which look to be beneficial and worth continuing.
The overriding aim of CMU is to break down barriers, reduce costs and increase competition and choice which can only be a good thing for businesses and consumers alike. CMU also serves as an overdue stocktake of the raft of legislation and regulation that has been implemented in the period following the 2008 financial crisis to determine that such legislation is working as intended and that it is still required. Certain specific areas have also been identified by CMU as potentially benefiting from revival and reform including, the facilitation of cross-border venture capital activity, the revival of the European securitisation market, and, harmonisation of the currently vastly differing European insolvency regimes.
The process of redrawing the lines between the UK and EU capital markets promises to be a lengthy, costly and complex exercise. Although CMU may not continue in its present form and direction there are undoubtedly worthwhile principles and proposed reforms at the heart of CMU which may prove useful when it comes to the UK and EU reshaping the capital markets regime in the wake of Brexit.
As already stated CMU is not a single piece of legislation or regulation and as such the level of the UK’s involvement in CMU is likely to be driven by what post-Brexit model for relations with the EU the UK is able to negotiate. Many market participants would support a model similar to that of Norway. The main reason offered in support of a Norwegian model is that it would represent the closest level of access to and integration with the single market to that which the UK enjoys today. In theory the Norwegian approach promises to cause the lowest levels of disruption, uncertainty, volatility and costs and could be relatively speedily negotiated with the EU. On closer examination however, in return for the level of access to the single market Norway allows free movement of labour from the EU, makes significant contributions to the EU budget and is forced to implement EU regulation without the ability to have very much say into the content of such regulations. Query therefore whether the UK government would in reality seek to negotiate a deal that would in substance be very similar to the one which the British public rejected in the referendum of 23 June. An alternative may be an approach similar to that of Switzerland whereby access to the single market is negotiated separately for different sectors on a bilateral basis. The benefits of the additional control this approach would bring may however, be outweighed by the time such negotiations would take and the associated additional prolonged period of disruption and uncertainty this would cause.
Regardless of the approach the UK takes what seems certain is that it will be forced to broadly follow the EU regulatory framework in order to retain access to the single market. As such some level of continued participation in CMU, at least in terms of any regulatory reforms, seems inevitable regardless of the UK’s actual preference.