For at least a year the Brexit debate has been conducted almost entirely on negative ground – arguing over how harmful it might be if we leave with no deal, or whether leaving the EU is already threatening the economy. There has been rather less discussion of the benefits of Brexit – what Britain will be able to do in the future which it can’t do as a member of the EU. It was this, after all, which won the 2016 referendum for Leave, so why have leavers been so shy about continuing to make the case for Brexit?
This week, though, comes one positive contribution in the shape of a paper on the financial services industry by the Institute of Economic Affairs (IEA). Resulting from a series of round table meetings with members of the industry it has produced a list of suggestions as to how Britain can benefit, post-Brexit, by changing the regulatory regime which is currently imposed through the second directive on markets and financial instruments (MiFID II). Its conclusion? That well-meaning directives which were supposed to protect the consumer have had the perverse effect of increasing charges, reducing choice – while at the same time making it more difficult for small companies to raise capital through stock markets. Come Brexit, there is no reason why UK firms should be bound by such regulation except where they are offering services to clients within the EU.
One of the rules introduced by MiFID II, for example, has been to stop broking firms and financial advisers recouping the costs of research from trading fees. Instead, retail investors must now be charged for such research separately. There was perfectly reasonable logic behind the ban – there was a fear that brokers had an incentive to persuade their clients to trade too frequently, rather than hanging onto investments. But the unintended consequence has been to discourage investors from investing in individual companies and to steer them towards funds instead – where charges are higher and often hidden. It has led to a reduction in the amount of research being carried out on smaller firms, making it harder for retail investors to obtain the information they need and making it harder for small companies to raise capital. One company worth £750 million, for example, previously had its performance regularly assessed by 15 analysts – but now there are just three of them keeping an eye on it.
As with so much regulation, MiFID II favours larger operators over smaller ones. Small stockbroking firms and financial advisers face proportionally far higher costs in meeting their regulatory requirements. Previously, for example, EU directives required the collection of 24 pieces of data for every transaction in regulated markets. Now it is 65 pieces of data. Such vast quantities of data do not ultimately help the consumer – they merely create a fog of data which helps no-one.
Then there is the matter of bankers' bonuses, which the EU has restricted to 100 per cent of salary, or up to 200 per cent with shareholder approval. The limit was supposed to make bankers more responsible, by forcing them to look to the long term rather than to their next bonus. But there was an obvious loophole – what if bankers simply increased their salaries to make up for lost bonuses? In practice, this is exactly what has happened – salaries have been jacked up threefold. For the banks themselves this has created a problem by increasing their fixed costs. Whereas in the past if they suffered a lean year they could slash bonuses, now there are still inflated salaries to pay.
There must be plenty of other industries which could benefit by being regulated in a smarter, more effective way than EU directives currently allow. Why are we not hearing more from them?