When there are delays, there will always be speculation as to the consequences after a final decision is made. Such is the case with Brexit negotiations, which have gone on longer than anyone initially contemplated. There have been all manners of guesses as to what might happen to the Pound, to the labor market, and to the GDP of the UK, but the latest debate to be rekindled is whether or not forex brokers will relocate to the EU. If the threat of losing EU customers becomes too great, FX brokers could move in a heartbeat.
The general consensus is that London, under any set of circumstances, will retain its title of being the “Financial Capital of the World”, but the fear is that, if the two regulatory establishments are out of sync in any way, then, as one pundit put it to reporters from ValueWalk:
Should London-based companies lose access to their EU investors, it will be a snatch and grab to who can find their next destination faster.
Recent investigations have revealed that as many as 50 large banks have prepared contingency plans for quickly moving their operations to such cities as Paris, Amsterdam, and Frankfurt. Yes, there would be a “brain drain” and loss of jobs, but the firms would not lose their competitive rankings in the scheme of things, especially in the FX arena.
If so many banks are preparing to jump ship, why are they delaying? What is it about London and the UK that keeps them there? Upon reflection, it becomes obvious why FX brokers and institutional traders are so drawn to London. Flexibility of the regulatory environment and the ability to quickly negotiate changes with EU member states are cited as the two most prominent reasons.
According to ValueWalk:
The United Kingdom is a great destination simply because it has the flexibility for unique regulations. For example, whenever the EU makes some kind of amendment to its financial regulations, almost every single member state is supposed to adopt those changes. The United Kingdom has been relatively free in this case as it can change the regulatory amendments according to their local realities and tailoring it to their investor base.
Since the UK did not join the common-currency brigade, it has the ability to remain independent of many of the EU restrictions that hamper EU’s member states. For example, when the European Securities and Markets Authority (ESMA) got tough on broker bonus programs, the FCA, the regulatory watchdog for the UK, was able to implement a quick exception ruling for its FX brokers. The FCA understood how much the local brokers needed incentives to attract new traders.
The regulator would eventually relent to ESMA statutes, since the assignment of “Beginner” status limited how a beginning trader could access various trading products, which actually created greater loss exposures for neophyte traders. This example, however, demonstrates how closely the brokerage and regulatory establishments can work together in a collaborative effort that benefits all parties in the industry.
Secondly, the FCA has also worked tirelessly behind the scenes negotiating special agreements with various member states in the EU. This process has been proven over time to be a much easier approach than trying to obtain an EU-wide rule change.
As long as London-based brokers are able to enjoy the best of both worlds, thanks in part to the efforts of the FCA, there will be a reluctance to leave. When it comes to trade and commerce, however, the UK and the EU may have to negotiate a single all-encompassing deal, if and when the Brexit issue is finally resolved.