As the Labor and Tory Parties are stymied via infighting, the resulting havoc means the fate of the financial services industry may not be decided for many months.
Former U.K. Prime Minister Harold Macmillan once famously said that a “week is a long time in politics,” but if recent events are anything to go by perhaps the statement should apply to 24 hours.
Within a day last week, U.K. politics was turned on its head in a series of events that would be worthy of any Shakespeare play.
The saga began with Boris Johnson, the leading Brexit campaigner and former London Mayor, being the bookies’ favorite to succeed Prime Minister David Cameron who is stepping down after losing the UK referendum on the European Union.
While the Tory party faithful waited for him to make the announcement last Thursday, Michael Gove, Justice Secretary and fellow Leave champion usurped Johnson’s position, after repeatedly claiming that he, Gove, was not the best man for the top job.
Against this backdrop, it is no wonder that commentators evoked the scenes of Hamlet with bodies littering the stage and Julius Cesar when the Roman emperor was betrayed by his friend Marcus Brutus – hence the headlines — “Et tu, Michael? Et tu, Gove?”
The next step is for Gove and the other candidates to take part in a series of ballots of the Tory party’s 329 members of parliament (MPs), starting on Tuesday, July 5. The two most popular will then go on to a vote of the wider party membership, with the result due on September 9.
At the moment, the bookmakers’ favorite is Home Secretary Theresa May at 1/3, followed by Energy and Climate Change minister Andrea Leadsom at 7/2, overtaking Gove at 12/1.
The Tory Party is not alone in tearing itself apart. The opposition Labor Party is doing an equally good job with leader Jeremy Corbyn refusing to step down after losing the support of around 80 percent of Labor MPs in a no confidence vote. Pundits expect a leadership challenge over the next few days but so far no one has come forward.
In the meantime, the City of London is left in limbo until Article 50 is invoked, which might not happen until later this year or next depending on who ultimately becomes prime minister.
As Paul Soltis, Confluence’s Market Manager for North America notes, “The Brexit vote just means that the E.U. treaties will no longer define the relationship between the U.K. and the E.U. member states, it doesn’t say how the new relationship will be defined.”
Soltis says there are two paths the U.K. could take. The first is the “Norwegian option,” in which the country would exit the E.U. but enter the European Economic Area which means it would still be subject to both UCITS and AIFMD, for example.
On the other end of the spectrum is the “WTO option,” according to Soltis, whereby the U.K. would have no new, special trade agreements with the Eurzone and would have to renegotiate these agreements from scratch. This second model would represent the most radical move away from the E.U. and result in the greatest changes from a legal perspective.
This would also impact the European Market Infrastructure Regulation (EMIR), where implementation has started. Leaving the E.U. would mean that the U.K. would not have to comply. However, because the country was one of the signatories to the G20 accord that inspired EMIR, market participants believe it would have to implement rules along the same lines.
The jury is out though over MiFID II, which has just been delayed until 2018.
Overall, the U.K.’s Financial Conduct Authority (FCA) has said that European laws still apply after “Brexit” but buy-side firms have argued that the regulation is not designed in the best interest of the end investor, particularly when it comes to volume caps on dark pool trading, the ban on broker-crossing networks, and the transparency regime for illiquid fixed income securities, according to a note from K&K Global Consulting.
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