by MATT LANGFORD

Jun 21, 2016

It is a well-known fact that the term ‘Brexit’ has appeared in all national news recently, with the UK seemingly divided as to whether or not they wish to remain in the European Union (EU). Whatever the outcome, changes in the UK regulatory landscape are sure to follow, but how exactly could this impact the U.S.?

Financial and Regulatory Effects

Currently, as Britain is a member of the EU, they face regulations coming straight out of Europe, but what would happen to the UK should they leave the EU? Would the regulations be tougher or would there be less red tape, leaving them freer to operate?

Both Norway and Switzerland do not belong to the EU and they too face the scenario like the UK does in the sense that they had to adopt EU rules (e.g., free movement of labour, free trade amongst member countries) or face being excluded from the single European market. These regulations are vital for the UK to export goods and services. As a result, if Britain were to leave the EU and not voluntarily adopt the EU’s rules, it is likely that the UK’s trade would be severely hindered because of their exclusion from the European market. This begs the question, if the UK were to the EU but then adopted the EU’s rules, why would they leave in the first place?

MiFID/MiFID II – Known as the Markets in Financial Instruments Directive, MiFID is a directive that aims to integrate the European Union’s financial markets and to increase the amount of cross border investment orders. The UK, and possibly the U.S., may need to look into restructuring some of its business to be compliant with MiFID II. Under the new MiFID II legislation, it may be possible for the UK to register as a Third Country Entity (TCE), meaning they can still carry out business with European countries. However, this method is not currently recognised under the existing MiFID II rules enforced by the European Securities and Markets Authority (ESMA); therefore it could be challenging for ESMA to understand how to adopt and regulate these TCEs under MiFID II. It may also be challenging for banks to understand what is required of them to be compliant when trading with the UK, as they may need to follow new rules when trading with a non-EU country.

EMIR – Known as the European Market Infrastructure Regulation, EMIR applies to financial and non-financial parties in the European Economic Area that need to report derivative trades to a trade repository. Should the UK decide to leave, this would not necessarily mean that the UK is exempt from EMIR altogether. However, if the UK were to set themselves up as a Third Country Entity (TCE), then they would be exempt from trade reporting, but would still need to comply with mandatory clearing and uncleared trade agreements.

Trade Effects

Currently, there are on-going discussions between the U.S. and the EU over the proposed Transatlantic Trade and Investment Partnership (T-TIP). This agreement would increase the opportunities for American workers and businesses in the European Markets, helping to bolster the already formidably strong U.S. economy.

Whilst debating Brexit, the UK has been warned by many senior political US figures, including Barack Obama, that if the UK were to leave the EU, trade agreements like T-TIP would no longer be prioritised. Some industry experts have predicted that these negotiations could last for around eight to ten years, so deprioritizing these negotiations would only exacerbate an already lengthy process.
This could have a detrimental effect on both the U.S. and UK. Currently the UK is the largest European importer of goods from the U.S and the seventh in the world (as of April 2016, the UK has imported $18,403.8m of American goods)1, and the second largest European exporter just behind Germany, and the fifth in the world (with $17,2987.28m of exports per year)2. If new trading tariffs were introduced, along with a weakened pound against the dollar (which could be a likely effect following withdrawal from the EU) then this is sure to affect both markets and consumers.
The U.S. is the UK’s largest importer of goods (importing $66.5bn in 2015, 14.5% of total UK exports )3 if the UK left the EU, this would largely effect the consumers in the U.S. Main exports to the U.S. include machinery and transport equipment, chemicals and minerals to name a few. If trading relations between the U.S. and UK fell through, then the U.S. market would certainly forgo these products and may have to source these from a separate country entirely.

Many large American banks and business also have branches and offices situated in the UK currently abiding by EU trading and regulation law. Should the UK decide to leave, many banks and business may also choose to relocate to somewhere else in Europe, instead of facing new laws and regulatory change that could be expected if Britain withdrew its European membership. This in turn would potentially have a downwards effect on foreign direct investment in the UK.
Conclusion

With the upcoming Brexit referendum around the corner, no one knows the true extent that this could affect the U.S. or the regulatory landscape in the UK. What is confirmed, however, is that if the UK did leave, then bilateral trade negotiations with the U.S. would need to start immediately to avoid disruptions in trade, along with a full understanding of where the UK stands with the current European regulations, such as MiFID II and EMIR. One thing is certain, though – following the referendum on June 23rd, these questions will be answered, and markets should stabilize, allowing the government to plan ahead for the future.

1 U.S. Census Bureau, Foreign Trade. U.S. Trade in Goods with United Kingdom. Available at: https://www.census.gov/foreign-trade/balance/c4120.html

2 U.S. Census Bureau, Foreign Trade. U.S. Trade in Goods with United Kingdom. Available at: https://www.census.gov/foreign-trade/balance/c4120.html

3 Workman, D. United Kingdom’s Top Import Partners. World Stop Exports. 2016. Available at: http://www.worldstopexports.com/united-kingdoms-top-import-partners/