International Journal of Law and Management

The EU Brexit implication on a single banking license and other aspects of

financial markets regulation in the UK
Norman Mugarura

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To cite this document:
Norman Mugarura , (2016),"The EU Brexit implication on a single banking license and other aspects
of financial markets regulation in the UK", International Journal of Law and Management, Vol. 58 Iss 4
pp. 468 - 483
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IJLMA
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Received 22 February 2016

Revised 22 February 2016
Accepted 13 April 2016

The EU Brexit implication on a

single banking license and other
aspects of financial markets
regulation in the UK
Norman Mugarura
Global Action Research and Development Initiative Limited, London, UK
Abstract

International Journal of Law and

Management
Vol. 58 No. 4, 2016
pp. 468-483
Emerald Group Publishing Limited
1754-243X
DOI 10.1108/IJLMA-02-2016-0018

Purpose The aim of the paper is to provide a review of potential Britains exit from the European
Union (EU) and its implication on financial markets regulation in the EU and UK. It explores the terrain
for financial markets regulation in the EU, pointing out how it impinges on the national legal system of
EU countries and what it could mean for the UK. It navigates the legal reforms the UK will have to
undertake to fill the void caused by its exit from the EU. Lastly, the paper proffers its thoughtful
analysis of the reform to undertake if the UK exited the EU, both in the UK and the EU.
Design/methodology/approach The paper has internalized empirical data generated by different
interest groups on the implication of potential British exit from the EU on markets and other core issues
which underpin the UK/EU relationship. These data were available in most major UK newspapers,
academic journals and textbooks, especially in expositing conceptual and theoretical issues
underpinning the paper. It has drawn comparisons with other jurisdictions, especially in East Africa, to
demonstrate the inherent challenges in integration of regional markets on individual member countries.
The paper also articulates other regulatory issues such as mutual recognition and the cost of Brexit on
businesses in the EU/UK.
Findings The findings of the paper confirm that British interests are likely to be better protected
if it remains the member of the EU but could be undermined if it relinquishes its membership.
Studies have been carried out by academic think tanks and the International Monetary Fund (IMF),
and they all indicate that British exit from the EU could be counterproductive for the UK.
Contemporary global challenges need global solutions, thus Britain will still need to forge alliance
with EU countries.
Research limitations/implications The limitation of the paper was that there are not many
comparative studies carried out on countries which have exited regional market initiatives and their
experiences after that. The paper has alluded to the experience of Uganda, which quit the East African
Community (EAC) in 1977 and rejoined it 23 years later. In a crucial issue like Brexit, the paper would
better evaluate the potential Brexit is drawing on experiences of countries which have exited and how
they have fared after that. There were not many comparable case studies on countries which have exited
regional markets.
Practical implications The paper discusses important practical issues relating to Brexit and its
implications on the UK/EU government and economies. It is practical because it weighs in on important
policy and legal issues on regulation of markets in the post-Brexit era in the UK and EU. As the UK
government goes for a referendum to decide its future relationship with EU, it will need to evaluate its
decisions by internalizing academic literature on Brexit, such as this paper.
Social implications The paper has social implications because Brexit will affect people and
markets in varied ways. It addresses pertinent issues related to the UK and its implication in the
post-Brexit era on the UK/EU economies.

Originality/value The paper is timely, original and a must read because it discusses pertinent
issues of the potential British exit and its implication for the UK and other stakeholders in a distinctive
way.
Keywords A single banking licence, Desired reforms in the post-Brexit era in the UK,
Mutual recognition, UK/EU relationship

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Paper type Research paper

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469
1. Introduction
The recent surveys in the Guardian (a UK newspaper) found that the majority of Britons
now want to leave the European Union (EU). Britains uneasy relationship with the EU
has a long history. In 1950, only 10 per cent of Britains exports went to the six countries
that formed the European Coal and Steel Community (ECSC). Concerns about the
Commonwealth, the welfare state and sovereignty led it to miss the boat at the Messina
conference in 1955, when the ECSC countries decided to form the European Economic
Community (EEC), the precursor of todays EU. In 1961, a Tory government under
Harold Macmillan, impressed by the EECs superior economic performance decided to
submit the first of several British applications to join the EU family. The aim of the
paper is to provide a review of potential Britains exit from the EU and its impact on
market access and its opportunity costs both to the EU and to UK. It explores the legal
reforms that the UK will have to undertake to fill the void caused by its exit from the EU
legal system on financial markets regulation in the UK. It has benefited from case
studies drawn in other regional markets such as Uganda, which exited the East African
Community (EAC) in 1977 only to rejoin in 2000 under the revised EAC treaty. The
paper has utilized empirical studies undertaken by specialist institutions to assess the
implication of UKs exit from the EU on the UK markets and globally. The Single
Banking License system was introduced by the Second Banking Directive (89/646/EEC)
in 1989 to enhance the integration of EUs financial institutions and their ability to do
business with each other. The paper has evaluated the impact of British exit from the EU
on application of a single banking licence and mutual recognition enjoyed by EU
financial institutions and markets. The final part of the paper proffers desired
recommendations for consideration by the UK, EU and other stakeholders.
The paper has utilized empirical data generated by different interest groups on
potential British exit from the EU and its implication on EU markets and other issues it
relates to. These data were available in most major UK newspapers, academic journals
and textbooks especially in expositing conceptual and theoretical issues underpinning
the paper. It has drawn comparisons (though briefly) with other jurisdictions to
demonstrate the implication of integration of regional markets on member countries.
The paper also discusses other issues such as the principle of mutual recognition and
analysis of the cost Brexit may have on businesses in the EU/UK and the reforms that
will have to be implemented. The limitation of the paper was that there are not many
comparative studies carried out on countries which have exited regional market
initiatives and their post-exit experiences. The paper has drawn on the experience of
Uganda, which quit the EAC in 1977 and rejoined it 23 years later.
The findings of the paper demonstrate that British interests are likely to be better
protected if it remains the member of the EU but could be undermined if it relinquishes
its membership. Studies have been carried out by academic think tanks and the
International Monetary Fund (IMF) and they all indicate that British exit from the EU

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470

could be counterproductive for the UK. Contemporary global challenges need global
solutions, thus Britain will still need to forge alliance with EU countries.
The limitation of the paper was that there are not many comparative studies carried
out on countries which have exited regional market initiatives and their experiences
after that. The paper has alluded to the experience of Uganda, which quit the EAC in
1977 and rejoined it 23 years later. The paper has important practical and social
implications for academic, policy and law because it addresses pertinent issues related
to the implication of potential Brexit on the UK/EU economies. It is of practical
significance because as the UK government ponders to quit the EU, its ultimate decision
will need to be evaluated based on well-analyzed data and practical evidence and this
paper does just that.
The paper has utilized empirical data generated by different interest groups to assess
the implication of British exit from the EU on markets and other core issues of UK/EU
relationship. These data were available in most major UK newspapers, academic
journals and textbooks especially in expositing conceptual and theoretical issues
underpinning the paper. It has drawn comparisons with other jurisdictions especially in
East Africa to demonstrate the inherent challenges in integration of regional markets on
individual member countries. The paper also discusses other issues such as the principle
of mutual recognition and analysis of the cost Brexit may have on businesses in the
EU/UK and the reforms that will have to be implemented.
The paper is timely, original and a must read because it discusses pertinent issues of
the potential British exit and its implication for the UK and other stakeholders in a
distinctive way.
The possibility of British exit from the EU can be compared to the Uganda exit from
the EAC in 1977. The EAC was established in 1967 for integration of the three East
African countries of Kenya, Tanzania and Uganda but dissolved in 1977. Uganda was
unhappy with the formula devised for the distribution of accrued benefits from the EAC.
Kenya was allegedly taking a lions share compared to Tanzania and Uganda. In 1977,
Uganda decided to quit, which made the whole EAC project to stall only to be revived in
2000.
2. An overview of the relationship of the EU and the UK
With the referendum (promised by the Tory government during the general election) for
the British vote on Brexit announced, Britain could be at the verge of exiting the EU.
Britain could more likely exit the EU largely because of its disproportionate externalities
on the UK an issue it is disenchanted about[1]. Britains uneasy relationship with the
EU has a long history caused partly by concerns of its national self-interests such as
Commonwealth, the welfare state and national sovereignty[2]. However, since joining
the EU in 1973, British trade rose rapidly since 1973 compared to other EU countries (the
EU now takes over 51 per cent of British exports of goods and close to 45 per cent if
services are added in)[2]. Whether Britain remains in or exits the EU, it will remain a key
partner for economic stability of the EU in trade and other policy areas. For non-member
countries such as Norway or Switzerland, trade with the EU constitutes a bigger share
of the total than it does for Britain. The effects of EU membership on trade patterns are
difficult to assess, but some studies carried out on Britains trade with the rest of the EU
found that it is 55 per cent better off, due to its being in the EU than it would have been
if it was not within it[2].

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However, the most disconcerting issue for Eurosceptics in the current UK

government hinges on the fact that the UK is losing its sovereignty on many issues such
as immigration and the welfare state system. To make their case for exit, Eurosceptics
try to articulate that the benefits gained from the EU are diminished when viewed in the
context of the costs of EU regulation on the UK businesses and organizations[2].
However, the foregoing argument is not supported by sufficient evidence and is seen as
a myth created to perpetuate politics of fear to hoodwink the public. The Organization
for Economic Cooperation and Development (OECD) carried out a study to compare the
extent of regulation in product and labour markets among its members and found that
Britain is among the least regulated countries in Europe. Actually, Britain compares
favourably with non-EU countries such as America, Australia and Canada. And there is
little to suggest that if it were to leave the EU, it would tear up many rules. One wonders
what the UK options are likely to be, especially given that Scotland is in favour of
staying in the EU and has indicated that if the UK leaves the EU it could call another
referendum. It is evident that Britain cannot break away from the EU and Scotland and
remain the same hegemonic country as it was before. What are its options? The most
viable option is that Britain could join the European Economic Area (EEA), a solution
adopted by all but one of the European Free Trade Association (EFTA) states that did
not join the EU[3]. The second option could be to emulate Switzerland, the remaining
EFTA country. Switzerland is not in the EEA but instead has forged a close relationship
with other countries by concluding bilateral agreements with the EU and OECD
countries[2]. The third likelihood is that Britain could seek to establish a customs union
with the EU, as Turkey has done, or at least to strike a deep and comprehensive
free-trade agreement. The fourth is simply to rely on World Trade Organization (WTO)
such as the principle of Most Favoured Nations (MFN) and National Treatment (NT) to
gain access into EU markets of goods and services. The fifth is to negotiate a special deal
for Britain alone that retains free trade with the EU but avoids the disadvantages of the
other models. In fact, Britain has influenced the EU for better. The European project it
joined in 1973 had obvious flaws: ludicrously expensive farm and fisheries policies, a
budget designed to cost Britain more than any other country, no single market and only
nine members. However, due partly to British political clout, the EU now has less
wasteful agricultural and fisheries policies, a budget to which Britain is a middling net
contributor, a liberal single market, a commitment to freer trade and 28 member
countries.
3. The European Union
The EU is a confederation of 27 member countries founded on the premise to
establish a common European market as stipulated under Article 2 of Treaty of
Rome 1957[4]. The European Community has been in existence for the past 63 years
within which it has gone through both structural and institutional changes at
different stages and the latest being the enlargement of its membership to 27
Member States. Integration of markets could foster harmonious relations between
states and end insatiable appetite for wars in some countries in Africa. Initially,
antagonistic countries like German and United Kingdom accepted to approximate
their economic policies to promote harmonious interstate relations and economic
development in Europe. The idea of establishing the EU was first mooted by
member countries in 1945 but deferred due to the war conditions until 1951 with

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signing of the ECSC treaty in Paris (Europa, 2011). This initiative would bring
European countries together economically and politically to prevent the
reoccurrence of war conditions that characterized European countries in 1940s. The
first six founders were Belgium, France Germany, Italy, Luxembourg and
Netherlands. They were later joined by Denmark, Ireland and UK in January 1973.
Spain would later join the EU family in January in 1986. In 1995, three countries of
Austria, Finland and Sweden entered the EU family (Europa, 2011). These countries
were later joined by 15 other countries (East European countries) bringing the total
number of EU countries to 27. After the UK had acceded to the EEC, it also accepted
to cede some of its sovereign powers as part of the deal and so also were other EU
member countries. Generally speaking, the state has reconstituted in many areas to
accommodate the needs of regional markets as already highlighted in the foregoing
example of UK accession to the EU. It is worth noting that as the state surrenders
some of its sovereign powers, not all of it is reconstituted in the integrated market
system apparently an issue which creates loopholes for exploitation by criminals in
varied ways (Europa, 2011). This issue cannot be as more discerning as it is, in the
frosty relationship between the EU and the UK [5]. In effect, this means that the state
has been constrained by supranational institutions in areas where it needs to have a
strong presence. To protect widespread interests of the state and to exercise the
authority of the state, it has been deemed more essential to remain statist on some
aspects than to uphold treaty obligations or other constraining obligations
(Likosky, 2002). The UK has not joined the euro, presumably to protect its currency
(which gives it leverage economically) and sovereignty from further erosion.
Tensions have been simmering in some EU member states over the future
direction of Europe and how to address the upsurge of immigration and other policy
issues in EU countries[6]. The critics contend that 40 years of UK membership in the
EU has not generated huge economic benefits, as anticipated when it joined.
However, this contention is not supported by evidence and is thus less credible. For
instance, the above discontent is premised on the fact that only 5 per cent of UK
registered companies directly export to the EU market and yet every business,
regardless of its size, is forced to bear the burden of EU regulations[6]. The EU is a
successfully integrated market which has served as a model for regionalization of
other markets in other parts of the world. It has a well-integrated internal market
made of 27 member countries, but it also has a robust regulatory framework fostered
through its four institutions which coordinate policy issues across Member States. It
is not yet clear, however, what the effect of recent enlargement of the union will have
on EU as the initial countries had one thing in common: economic parity and
congruence in culture. The recent admission of 15 countries to the EU family (which
by all standards are not expected to have the same clout as the original member
countries) has already generated externalities on jobs, health and social services in
individual Member States, such as the UK. The despondence in some EU member
countries and state-centred hard-line stance would not have been as pronounced as
it is today if the enlargement of EU (by admitting 12 new member counties into the
EU family) also enlarged economic opportunities to member countries. The
disproportionate distribution of economic opportunities and challenges has made
some countries revaluate the idea of staying in the enlarged EU or getting out. It is
perhaps worth noting that the success of the European single market has been

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partly attributed to willingness of Member States to surrender their sovereignty to

create space for a functional European market. The success of the global market
system depends on a shared sense of purpose fostered through good leadership and
the philosophy that the many we are, the easier it is to defeat our common
enemy[6]. The EU is governed by a well-devised system of laws which overrides
national laws and thus generates direct effect within member countries. For
example, when regulations have been issued to a member state, either by the Council
or any other European institution, they are directly applicable into a member state.
This is based on Article 226 of the Treaty of Rome which provides a framework for
state in transposing EU law in their member countries (Europa, 2011). The EU is
governed by a uniform framework of rules such as direct effect and also augmented
by adjudication role of the European Court of Justice (ECJ) in adjudicating cases
involving EU and a member state. Once its decisions have been issued, they are final
and must be implemented in a member country without further negotiation (Europa,
2011). Countries should participate in regional markets initiatives only if they
benefit from it and not being alienated, otherwise they become indefensible to justify
why a country should join them. However, where there are disparities in
development, naturally the system would be lopsided in terms of distributing the
accrued benefits in all stakeholder countries (Europa, 2011).
The paper has drawn a comparison between the potential British exit from the EU to
the experience of countries such as Uganda, which exited the EAC in 1977 only to rejoin
it later. The EAC was established in 1967 for integration of three East African countries
of Kenya, Tanzania and was dissolved in 1977 after being in existence for only ten
years[7]. Uganda was not pleased that Kenya was disproportionately taking a lions
share of accrued benefits from the EAC and it had had enough and quit in 1977.
However, it was revived in the early 1990s because EAC countries were increasingly
marginalized in international trade system and was operationalized again in 2000. One
can deduce from this analysis that it is not easy for regional member countries to gain
proportionately from regional initiatives. These asymmetries are reflected in the current
EAC where Kenya still dominates regional trade as compared to Uganda, Tanzania,
Rwanda and Burundi. The paper has drawn parallels with EAC to highlight the inherent
challenges and dilemma of regional integration of markets. It is evident that the history
of East Africa integration has been problematic and dogged by the problem of unequal
distribution of accrued benefits given the structure of the economies that are basically
similar and non-complimentary[7]. Therefore, the politics of regional integration of
markets is greatly influenced by the distribution of accrued benefits and where a
country like Great Britain perceives that its sovereignty and influence is being sidelined
in the EU membership, it has every right to seek a renegotiation of terms of its
membership or to quit if it reflects the general consensus of the British public. One can
also argue that unless there is an equitable framework for addressing economic
imbalance emanating from unequal distribution of regional benefits, disgruntled
countries will continue to agitate for changes or could also break away like Britain
proposes to do. At the moment, however, the empirical evidence seems to suggest that
Britain is better of within than without the EU. This analysis sets the context for
evaluating the possibility of Britains exit from the European Union and its effect on
financial markets regulation such as a single banking licence, mutual recognition and
home country control.

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4. The single banking license

The Directive defines a financial institution as an undertaking other than credit
institutions whose main activity is to carry out one or more of the functions listed in the
Second Banking Directive [8]. These functions include lending (consumer and
mortgage credit), financial leasing, money transmission service, guarantees and
commitments, trading for own account or for customers account, money broking,
portfolio management and advice[9]. Financial institutions also include insurance
companies authorized in accordance with the insurance Directive (79/267/EEC) as
amended (Alexander et al., 2006). The Single Banking License system was introduced by
the Second Banking (89/646/EEC) in 1989 to ease the ability of EU financial institutions
to do business with each other. As such, credit institutions which are authorized to
operate in any Member State are allowed to establish branches and to provide
cross-frontier services throughout the community on the basis of the fundamental
principle of home country supervision. No Member State will be able to impose local
endowment capital[10] requirements on branches of credit institutions from other
Member States or to apply an economic needs test on their establishment[11].
Provided they are so authorized by their home Member State, credit institutions can also
offer a wide range of investment-related services as well as traditional banking and
payment services. The Second Banking Directive was designed to create the worlds
largest banking market free of regulatory barriers[11]. The single banking licence
extends to EFTA countries other than Switzerland as soon as the EEA agreement enters
into force[11].
Before Member States can access the advantage of the single banking licence, they
need to first implement second banking Directive in their national legal system. The
single banking licence rests on the premise of sound minimum prudential standards in
all financial institutions. These freedoms have also been incorporated in other directives
such as the Own Funds and Solvency Ratio Directives and the Second Consolidated
Supervision Directive, which came in force in January 1993. These define bank capital
and minimum prudential ratios, which banks must apply to benefit from the single
passport. The foregoing obstacles were a hindrance to trade in financial services and
following the model of the second banking directive, the Insurance Directive also
introduced the single licence for member countries to access the single insurance
markets[11]. Insurance companies can offer the full range of their products and services
throughout the European community on the basis of a single authorization and
subsequent supervision in their country of establishment[11]. We noted in the foregoing
analysis that the benefit of mutual recognition and single licence are available to EU
countries after they have adopted and implemented the respective EU directives.
Therefore, there is a possibility that with UK exit from the EU family of countries, it
could have far-reaching implication in terms of their ability to access the advantages
accrued to EU member countries. Another possibility is that the UK could join EFTA
countries and could still be entitled to a limited market access which is available to
AFTA countries. The ECs single market in financial services was designed to be the
most open major market in the world. Most of EEC Directives contain liberal provisions
for third country situations to make full use of the new banking regime. They are
guaranteed open access to the EC market so long as their own authorities offer EC banks
treatment at least as good as that offered to their domestic banks (i.e. national
treatment rather than equal treatment). Non-EC banks can therefore enjoy full access

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to the EC market even where their domestic rules may be more restrictive than those
applying in the community.
5. Mutual recognition model
The principle of mutual recognition used in integration of financial markets in Europe
is a regulatory model based on the recognition and harmonization of a managed
regulatory system, as opposed to issuing hundreds of directives to foster uniformity in
all EU member states. Mutual recognition is a central plank of the Second Banking
Directive[12][13], based on the fact that rather than emphasizing convergence of the
system (which would not be possible given different legal systems and cultural
backgrounds across EU member states), supervisory authorities should instead
recognize systems operated by other European member states provided they fulfill
certain basic conditions[13]. The principle of mutual recognition was enunciated by
their Lordships decision in the case of Cassis de Dijon[14]. The case concerned a French
Liqueur with an alcoholic level of 15 to 20 per cent instead of 25 per cent prescribed for
liqueur by Germany alcohol content requirements. The court denied the admissibility of
such a limitation and upheld the principle of mutual recognition (known as Cassis de
Dijon principle), signifying that a product manufactured according to regulations and
permitted in one EU member state must be permitted in other EU member states. The
exception can only be made to serve public interest (e.g. protection of health, the
environment or consumers). Mutual recognition is used in the commercial sphere to
overcome the hindrance of international movement of natural and juristical persons,
goods and services inherent in different EU member countries[15].
The principle of mutual recognition was introduced by the Second Banking Directive
in 1989 on the premise that the integration of financial markets in Europe did not
necessarily mean a one-size-fits-all approach but to forge unity in diversity. It was
adopted in recognition that as EU member states are characterized by different internal
legal systems (contract laws and employment laws, different regulatory environments
co-existing within the EU law), it would not be practically feasible to subject them to a
rigorous EU regulatory system uniformly. Mutual recognition is fostered through the
EU member states willingness to surrender part of their sovereignty; an integrated
single European market would never have been a reality. It emphasizes the equivalence
of the objective of national legislation and the existence of similar public interest goals
and also implies and requires mutual trust (Lastra, 2008). Mutual trust, in turn, is
fostered through the adoption of common rules. Mutual recognition and minimum
harmonization in the EU are accompanied by other pillars: home country control and a
single banking licence (Lastra, 2008). The principle of home country control is designed
to ensure that the home country undertakes to control and supervise its financial
institutions as a substitute for host country supervision (Lastra, 2008). Thus, EU
member states are required to harmonise their laws so as to accommodate the legal
systems of other countries in the practice of EU law. In practice, where desired laws have
not been internalized by individual countries national legal systems, mutual recognition
would not work. Banks also face the risk of law suit if they freeze customers accounts of
potential money launderers or disclose information relating to their accounts to
anti-money laundering (AML) agencies (Cranston, 2007). In relation to the principle of
home country control, the home country undertakes to control and supervises its
financial institutions as a substitute for host country supervision (Lastra, 2008). They

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would have enacted desired laws because for laws to regulate undesired conduct, they
need to have been internalized and in existence[16]. It needs to be noted that laws cannot
be implemented in a vacuum.
6. The Brexit implications on UK businesses
A considerable amount of legislation governing the UK is based on EU law, and if parts
of the UKs legislation are no longer constrained by EU directives, then the British
parliament can effectively scrap EU law and impose its own variant. The UK exit from
the EU will affect the UK in varied ways. Take the employment law, for example much
of Britains employment law comes from European directives. Therefore, the
government will need to take into account the political sensitivities of making any big
changes and their likely implications for the economy. So while areas like discrimination
rights are probably safe, other less popular measures like the rights of agency worker
regulations (most of which is influenced by EU) could be ignored altogether. Businesses
and individuals are now used to arranging themselves around the existing laws, and if
they were to change dramatically and quickly it could cause huge uncertainty. However,
the strong consensus among experts is that some unpopular areas of EU-related
employment law such as the Working Time Directive may be tweaked, but there are
unlikely to be big changes[17]. Withdrawing from the EU would give the UK greater
freedom to frame its own competition laws, which may not be modelled so closely on the
provision of the Treaty on the Functioning of the European Union (TFEU) (as they are
now). The EC would also lose its legal jurisdiction over the UK so, for example,
businesses involved in a cross-border cartel covering both EU countries and the UK
would face separate investigations from the EC and UK, rather than just from the
former.
It is also no brainer that the effects of Brexit will affect lawyers not least in trade,
foreign investment, property and finance transactions areas where they are normally
in great demand. Customs duties, declarations of goods at borders, tariffs are things EU
member states do not have to taken into account when trading with another EU member
state. Being part of the EU also allows member states access to EU-negotiated Free
Trade Agreements (FTAs) with other countries. The big ones you may have heard of are
the Comprehensive Economic and Trade Agreement (CETA) between the EU and
Canada and the proposed Transatlantic Trade and Investment Partnership (TTIP)
between the EU and the USA. Exiting the EU would require the UK to renegotiate its
trade deals and FTAs across the board. Advocates of Brexit claim this will put Britain
in a strong position for negotiating beneficial trade deals, but this argument rests upon
whether we are seen as a desirable trading partner. USA trade representative (Mr
Michael Froman) recently expressed his concerns about Brexit that Britain has a greater
voice at the trade table being part of the EU, as it is a larger economic entity than being
out. Froman went on to point out that the USA is not particularly in the market for
FTAs with individual countries[18]. So attempting to negotiate our own deals with the
USA could lead to British companies facing tariffs on goods exported to the States
China currently pays 80 per cent tariffs on some of its products[18]. The study by
National Institute of Economic and Social Research in 2004 found that an exit from the
EU would permanently reduce UK GDP by 2.25 per cent due as a result of reduced flow
of FDI into the UK. This claim is bolstered by another study by the London School of
Economics, which revealed that the UK could lose revenue ranging from 6.3 to 9.5 per

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cent of GDP equivalent to loss caused by the global financial crisis between 2008-2009.
These studies warn the UK that needs to rethink the idea of abandoning a project from
which it has enormously benefited over the years.
7. How the UK financial institutions fare outside of the EU market?
If the UK exits from EU, some financial institutions could relocate to other EU markets
to take advantage of the EU single banking licence and other freedoms that will no
longer be available in the UK. At the moment, the EU operates a passport system,
which means that if a financial services firm is authorized to carry out activities by one
member state, it can freely trade with and commence business in another. If you are an
international business EU-based or otherwise that is handy. Foreign financial
service institutions like to use the UK as a gateway to the EUs single market. So, if
Britain loses its ability to hand out EU passports to companies, institutions may
decide to set up their European HQ in Frankfurt or Paris rather than London. If the UK
became a member of the EEA it would retain the right to assign passports to
companies, but that would leave the UK having to comply with EU laws with no say in
the decision-making process. Another option would be to follow the Swiss model and
negotiate treaties for each market they want to gain access to; but the UK would still be
following EU rules with no influence over them. Closer to home, the UK could join the
EEA or forge bilateral treaties to trade with EU member countries. But UK companies
trading with EU countries by dint of these treaties would still have to abide by
manufacturing standards and conditions imposed by the EU. The only exception will be
companies selling to the UK domestic market. Access to the EU-free trade area would
undoubtedly be one of the factors influencing how attractive the UK remains as a
business location post-Brexit. For example, Britain and London in particular
currently attract the highest level of commercial property investment in Europe. The
recent global cities report by property consultants Knight Frank put commercial
property investment in London at 31.7 billion during the year up to the second quarter
of 2015 and a significant proportion of that comes from overseas investors. A KPMG
survey of real estate experts found that 66 per cent of respondents thought a Brexit
would negatively affect foreign property investment in the UK[19]. For UK banks
operating internationally, or overseas banks operating through UK subsidiaries,
probably the single most important aspect of the UKs membership of the EU is access
to the single passport. This is the name given to the system of mutual regulatory
recognition, which enables banks providing financial services in one Member State to
operate in other Member States without having to seek authorization in each and every
Member State in which they wish to operate. Many non-EU banks take advantage of this
system and use the UK as their gateway to Europe, thus enabling them to benefit from
the four freedoms of movement which membership of the EU confers. If the UK were to
leave the EU, UK-based banks (including non-EU banks operating through UK
subsidiaries) risk losing that passport. This would mean that they need to establish
operations in an EU Member State to maintain access to markets in other EU Member
States. Alternatively, they would have to revert to individual applications for
authorizations in individual countries (with the time, relocation and cost consequences
which this would entail). This could potentially have significant consequences for the
financial services industry in the UK. The Association of Foreign Banks has put it that
If Britain withdraws from Europe, and then foreign banks may reassess their reasons

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for maintaining their business in Britain and may decide to continue their business
elsewhere. A recent survey conducted for City UK suggested that 37 per cent of
financial services companies say that they are very likely or fairly likely to relocate staff
if the UK left the EU. The HSBC has indicated that it will relocate its headquarters to
Singapore if Britain exits the EU. This will be due to high taxes of operating in the rest
of Europe and also the costs of over-regulation that could substantially slash their profit
margins.
8. Capital requirements regulations (CRR) and the capital requirements
directive (CRD IV)
CRR applies to banks and certain types of financial institutions or investment firms. As
a regulation, the CRR is already directly applicable and is reflected in the regulatory
requirements contained in the FCA handbook and/or the PRA handbook, as are the
provisions of Capital requirements regulation and directive (CRD) IV[20]. Brexit would,
therefore, be unlikely to trigger any immediate requirements for change. Over time,
however, it is possible that regulatory requirements in the EU and those in the UK may
diverge. In any event, UK banks will continue to need to comply with Basel Committee
Guidelines such as the proposed Basel III. Basel III is an international voluntary
regulatory framework, which was agreed upon by the members of the Basel Committee
on Banking Supervision in 2010-2011. Basel III is a comprehensive set of reform
measures, developed by the Basel Committee on Banking Supervision, to strengthen the
regulation, supervision and risk management of the banking sector. These measures
were to improve the banking sectors ability to absorb shocks arising from financial and
economic stress, to improve risk management and governance and to strengthen banks
transparency and disclosures[21]. Unlike Basel I and Basel II, which focus primarily on
the level of bank loss reserves that banks are required to hold, Basel III focuses primarily
on the risk of a run on the bank by requiring differing levels of reserves for different
forms of bank deposits and other borrowings. Therefore, Basel III does not, for the most
part, supersede the guidelines enunciated under Basel I and Basel II, it rather
consolidates them[22].
Basel 111 Capital Adequacy Regulatory Framework requires banks to hold more
capital reserve to safeguard against future financial crises. Basel III, as a regulatory
model will include a minimum core Tier I of somewhere between seven and nine per
cent of their risk bearing assets, including capital conservation buffer. Tier I refers to
banks capital reserve, which is intended to absorb shocks more robustly, as opposed to
the core level of two per cent under existing rules[23]. The core level of two per cent was
deemed too inadequate to caution economies against financial shocks in the event of a
financial crisis. Basel III will include a minimum Tier I ratio of 4.5 to 6 per cent with the
additional capital reservation buffer of two to three per cent. The Basel III regulatory
framework could suffer the fate of its predecessors unless it is imbued with mechanisms
to harmonise regulatory differences across jurisdictions[22]. However, it would seem
that the highly capitalized banks will receive a disproportionate advantage over less
capitalized ones and this is likely to become a potential area of contention for the
proposed regulatory measures to work across the board. Thus, less capitalised banks
will be less inclined to support the proposed Basel III, as necessary as it is. However,
there is a possibility that poorly capitalized banks could be less inclined to implement
Basel III. There is a possibility that the proposed Basel III capital framework will be

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inclined to favour banks in developed financial centres as opposed to those in least

developed countries (LDCs). The proposed high liquidity ratio has also been criticized
that it is likely to damage the financial sector and the wider economy. High capital and
liquidity requirements are proposed to ensure that banks are better prepared to deal
with crises than they have been through lately. Regulators are pressuring banks to build
up buffers, well in advance of the 2019 Basel III regulatory framework deadline, in the
hope of making them safer in good time[24]. While central banks are pumping money
into the economy in the form of liquidity easing so that banks can start lending to small
businesses, banks are withholding that money to build their regulatory buffers before
the deadlines kicks in. Small businesses are important for the economy in terms of jobs
and providing sales outlets for big industries. This means that when small businesses
are constrained due to lack of credit facilities such as loans, it can potentially inflict
damage on the well-being of the wider economy. Basel III regulatory framework is not
sustainable because it puts pressure on banks and could ruin/affect the economy in the
long run. Banks should have the flexibility to draw on their liquidity buffers to absorb
current pressures as they may be encountered from time to time. In my opinion, the
one-size-fits-all approach overlooks important practical realities and could engender
disparities some banks being outcompeted by well-resourced ones. In view of the
foregoing analysis, the UK banks will still be bound by the Basel III regulatory
framework regardless of whether it stays or leaves the European community. Basel III is
the regulatory framework which binds all internationally-active banks of which UK
ones are not an exception.
9. Bank recovery and resolution directive
This Directive has already been implemented in the UK law though secondary
legislation and amendments to primary legislation and is reflected in the regulatory
requirements of the FCA and the PRA[25]. Again, the likelihood of any immediate
change would depend on the UKs chosen route to withdrawal. There is, in any event,
scope for future divergence.
10. EU insolvency regulation and EU reorganization and winding up
As a member of the EU, the UK benefits from the EU Insolvency Regulation which is
designed to harmonise insolvency regimes across the EU (except Denmark) and to
facilitate cross-border insolvencies[26]. It applies to individuals and corporates but not
to banks, insurance companies and certain other forms of financial institutions. While
not relevant where a bank is itself the subject of insolvency proceedings, it will be
relevant to banks in their dealings with their borrowers with operations in other member
states. Unless replaced by an alternative agreement with the EU or individual EU
member states, banks lending to such borrowers who take enforcement proceedings
and/or institute insolvency proceedings in the UK, may find themselves exposed to the
risk of competing insolvency proceedings being commenced in one or more jurisdictions
and of not being able to rely on the primacy of the UK proceedings[26].
Bank insolvencies are subject to separate legislations introduced to implement the
EC Reorganization and Winding up Directive applicable to credit institutions. These
currently address the question of which member states insolvency laws will prevail in
any insolvency of an EU bank with cross-border operations or cross-border banking
groups[26]. As a Directive, this is currently reflected in the UK law, but if Brexit occurs

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and the UK retains the same or similar arrangements, whether these would be
recognized and honoured by the EU and other Member States is unclear. Other key
directives (and the implementing UK legislation) that will need to be considered include
the Consumer Protection Directive and the Mortgage Lending Directive[27].
11. What will be the effect of Brexit on loan agreements?
Existing loan documentation is based on both EU and domestic UK legislations, and so
market participants will need to analyze the documentation to discern which changes
will need to be made. Apart from the obvious need to remove and/or replace redundant
references to EU regulations and EU directives and any relevant national-implementing
legislation or regulations, particular areas which will or may need to be considered
include: increased costs clauses and references to CRD IV[28]. The Contract Act 1991
which transposes the Rome Convention in 1980 may still be applicable in the UK to
govern contractual agreements but it could also be dispensed with. But, the issue of
loans also raises many issues of consumer protection most of which is based on EU
regulation[29]. Tax matters such as withholding tax and VAT provisions in the existing
network of UK double tax treaties should avoid the need for wholesale changes to the
withholding tax provisions. Consumer protection provisions which are subject to
various forms of EU legislation, and governing laws and jurisdictions clauses and issues
concerning the enforcement of judgements will have to be revised.
12. Conclusion
The paper has demonstrated (using expert evidence on Brexit analysis) that the UK will
be stronger in than when it is out of the EU. The overriding objective of the EU is to solve
economic and political problems of individual nation-states but it also means that they
will have to accept to lose some of the sovereignty as an opportunity cost of a
fully-fledged functional E U. This is caught by the adage that global problems need
global solutions and breaking away from the rest of the EU member countries might
arguably not be the right way in enhancing the interests of the UK. One can argue that
gone are the days of state protectionism that characterised the post-second world war
conditions (though still manifested in subtle trade practices of some states). There is
compelling evidence that the UK has gained substantially from the EU and these
advantages should supersede its other national concerns such as the upsurge of
immigration on the state. Besides, the proliferation of supranational institutions such as
the EU and the EAC in East Africa has curtailed the powers of individual states which,
however, should be seen as a cost of regional integration. Gone are the days when
policing national borders alone, as a mechanism for preventing challenges spilling over
from the other side, was a viable option. This implies that whether the UK regains its full
sovereignty over sticky issues such as immigration or it stays in the EU, it will still need
to forge common alliances with other EU countries to secure its borders. Forging
alliance with EU countries might be costly, given that it would have turned its back on
other EU members only to reincarnate its relationship in other subtle forms. For
instance, it is not easy for national enforcement agencies to control telecommunicationrelated crimes, such as theft of intellectual property rights, electronic dissemination of
offensive materials, and electronic money laundering and electronic vandalism through
physical land borders. The prospect of cyber-crimes and terrorism poses far greater
threats for national policing agencies. These threats cut across geographic, social,

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political and gender boundaries, calling into question the conventional notions of space,
place and time in the narrow confines of sovereign states. This means that the UK could
be exposed to criminal exploitation if it loses the greater protection afforded by the EU.
Based on our analysis, it can be argued that the UK is likely to be better protected within
the EU regulatory framework where it has access to a single banking licence, mutual
recognition and unfettered freedom to operate in the larger EU market with minimal
taxes on its goods. Interstate cooperation is essential to safeguard against regulatory
failures caused by free riding (countries doing trade deals to gain a greater share of the
market) and bending rules[30]. In the event that the UK decides to discard the EU
project, they will need to undertake legal reforms in banking; intellectual property
rights, consumer and contract laws so on and so forth to plug the void caused by its
departure from the EU. This could prove costly for courts, businesses, citizens and the
national government, which may not endear the UK markets to the rest of the world.
However, as the UK has competitive advantage in financial services markets, it could
still do well emulating Switzerland, which is not a member of the EU and it is still a
vibrant financial market.
I argued in my PhD thesis that before countries accede to common regulatory
initiatives such as the EU or EAC in East Africa, they would have evaluated its
far-reaching implications to ensure that they do not make ill-thought decisions and are
consequently side-lined. It is worth noting, however, that differences between member
countries will always abound and it would be fallacious to imagine that by acceding to
regional markets, they are gone away. Countries would have evaluated what works for
them and what does not work and made the necessary trade off accordingly. Thus, the
adoption of global regulatory frameworks based on global standards should be
implemented by countries taking into account their individual development objectives.
For instance, the UK is not a member of the euro and the USA is not a signatory to the
International criminal Court (ICC). Countries have every right not to join global
regulatory initiatives until they have garnered the capacity to harness them effectively.
However, ultimately, global challenges require concerted efforts of all countries
concerned and no country can afford to posture. Quitting the EU might not only side-line
UKs influence in Europe but it would have lost its leverage of being an influential
member of the influential trading bloc in the world in the name of the EU. While
integration of economies is literally not a walk in the park, the challenges elucidated in
the preceding sections of the paper regarding the EU and the EAC, countries are still
better off to pursue their development objectives within the membership of regional
market initiatives than unilaterally on their own as individual states[31]. Countries
should have evaluated what works for them and what does not work and make the
necessary trade off. They should not be dis-franchised but instead be seen to influence
and define the nature of initiatives they belong to and are bound to. Ultimately, it is up
to the UK to decide whether leaving or staying in the EU is good for Britain as a
sovereign state!
Notes
1. The Guardian Newspaper, 8th February 2016.
2. The Economist magazine 15th February 2016
3. The EEA now consists of Norway, Iceland and Liechtenstein.

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4. This article reads The Community shall have as its task, by establishing a common market
and progressively approximating the economic policies of Member States, to promote
throughout the Community a harmonious development of economic activities, a continuous
and balanced expansion, an increase in stability, an accelerated raising of the standard of
living and closer relations between the States belonging to it.
5. By the Treaty of Amsterdam amending the Treaty of the European Union and establishing the
European Communities which was signed on 2 October 1997, and entered into force on 1 May
1999. It made substantial changes to the Treaty of Maastricht, which had been signed in 1992.
6. Daily Mail, Monday, June 22, 2015.
7. See its website at: www.eac.int

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8. See in particular article 1 of the Directive, (79/267/EEC).

9. Directive 89/646/EEC, in particular numbers 2 to 12 and 14 of the list attached to the Directive.
10. An endowment capital is a donation made to a non-profit group, institution or individual
consisting of investment funds or other property that may or may not have a stated purpose
at the bequest of the donor. Most endowments are designed to keep the principal amount
intact while using the investment income from dividends for charitable efforts.
11. http://europa.eu/rapid/press-release_IP-92-1058_en.htm?localeen (date 8th February 2016).
12. This was designed to foster a single market doctrine in banking and financial services, with
no internal barriers to EC banks establishing branches in other parts of the EC or in providing
cross-border services. A bank licensed in one EU member State had a passport to establish
branches or to provide services in other EC Member States. A single licence is required rather
than licensing in each member state. However, the licence does not apply to a branch of a bank
established outside of the EU; the third bank must incorporate a subsidiary in the community
and be licensed in at least one jurisdiction there.
13. Council Directive: 89/646/EEC.
14. The principles enunciated by their Lordships in Cassis de Dijon doctrine has also expanded
geographically, beyond EU borders. Through the conclusion of the EEA (European Economic
Area) Agreement and the EC-Turkey customs union, the principle of mutual recognition has,
with some variations, now been extended to goods coming from Norway, Iceland and
Liechtenstein (as EEA members) and Turkey. To implement this principle, the European
Commission has insisted that EU Member States insert a mutual recognition clause into all
commercial agreements.
15. Case 120/78 (1979) ECR 1-64.
16. This renders societies prone to drug trafficking and money laundering, scaring off potential
investors who usually prefer a sound regulatory regime to safeguard their investments.
17. If the UK leaves Europe completely, there is scope for it to wipe the slate clean of all EU
legislation, or to keep the parts it wants to and get rid of those it doesnt, says
Chambers-ranked employment barrister Charlotte Davies of Littleton Chambers. However, if
it were to join the EEA instead there is less scope for making changes and it would still have
to accept the majority of EU law. But Davies is doubtful therell be a complete rewriting of the
law for two reasons: Lots of employment laws which have derived from Europe are now
ingrained into UK culture and business practices.
18. The Economist magazine 13th-20th February 2016.

19. The lead-up to the EU referendum itself is likely to be rocky for both domestic and
international businesses. Ratings agency Standard Poors has even indicated it may cut the
UKs credit rating if Britains departure starts looking likely. And if the UK votes to leave, the
markets wont settle down straight away.

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20. Capital Requirements Directive (2013/36/EU)

21. It was designed to correct deficiencies in financial regulatory system revealed by the financial
crisis of 2007-2008.
22. The Financial Times, 26 June 2010.
23. Making supervisory stress tests more macroprudential: Considering liquidity and solvency
interactions and systemic risk, BCSS Working paper No 29.
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24. The Daily Mail, 12th June 2012.

25. Directive 2014/59/EU.
26. Directive 2001/24/EC.
27. See, Directive 2011/83/EU.
28. The Capital Requirements Directive (CRD) is an EU legislative package that contains
prudential rules for banks, building societies and investment firms.
29. Directive 97/7/EC on the protection of consumers in respect of distance contracts and
Directive 85/577/EEC to protect consumer in respect of contracts negotiated away from
business premises. Directive 1999/44/EC on certain aspects of the sale of consumer goods and
associated guarantees as well as Directive 93/13/EEC on unfair terms in consumer contracts
remains in force.
30. This was precisely the reason for the adoption of United Nations Convention on Drugs and
other psychotropic Substances, (otherwise known as the Vienna Convention) in 1988.
31. European Member countries are required to implement national measures through their home
Parliament to transpose EU law but this does not mean that they are integrated. Economies
are allowed to undertake a level of minimum harmonization and home country control which
in a way creates a dual regulatory system.
References
Alexander, K., Dhumale, R and Eatwell, J. (2006), Global Governance of Financial Systems:
International Regulation of Systemic Risk, Oxford University Press, Oxford, p. 276.
Cranston, R. (2007), Principles of Banking Law, 2nd ed., Oxford University Press, Oxford, p. 8
Europa (2011), available at: www.europa.org (accessed 19 August 2011).
Lastra, R.M. (2008), Law reform in emerging economies, Journal of International Banking Law
Regulations, Vol. 3 No. 2, p. 419
Likosky, M. (2002), Transnational Legal Processes Globalization and Power Disparities,
Butterworth, p. 19
Corresponding author
Norman Mugarura can be contacted at: n2000mugarura@yahoo.co.uk
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