This week’s Brexit-related news saw more evidence emerging that trade in goods is considerably affected by Brexit. At the same time, in search for its place in the post-Brexit world economy, the UK Government continues down the path of a ‘hard Brexit’ approach, which sees the government adopt a rather confrontational stance towards the EU and pursuing regulatory reforms that focus on Global competition rather than seeking continuing alignment with European standards.
Trade – teething problems or permanent shift?
As more EU countries publish their trade figures for the beginning of the year, it seems increasingly clear that Brexit has led to reduced trade between Britain and the EU beyond the impact of the Covid19 pandemic. The French customs office reported a decline a decline of 13% of French exports to the UK and a 20% decline of imports from the UK. This is in the context of otherwise raising trade activity in France in January 2021.
Brexit is also reshaping the shipping routes between Ireland, Great Britain, and the European continent. In order to avoid new custom checks and red tape at the EU-British borders, shipping companies have increased capacity on the – longer – routes linking the Republic of Ireland directly to the continent while reducing services on the shorter ‘land link’ via Great Britain.
The UK government, however, maintains that trade volumes are back to normal after a sort slump immediately after the end of the transition period on January 1st, 2021.
It is of course still too early to know whether any of these changes in trading patterns will be permanent or are simply the result of companies still having to adapt to the new formalities that were introduced at very short notice.
The emerging relationship with the EU – between nostalgia and humility?
A more important issue that continues to make the headlines is the emerging relationship between the UK and the EU.
A recent study by a group of researchers at King’s College London and Harvard, investigated how the ‘Global Britain’ slogan may be transformed into an actual policy after Brexit. The report points out the inherent ambiguous nature of term, which seeks to signal openness and international orientation, while smacking of nostalgia for Britain’s lost imperial power. The authors – based on interviews with politicians and civil servants in the UK and overseas – suggest that to be successful the Global Britain narrative needs to be outward looking and collaborative not adversarial, humble not arrogant, and appeal to both international and domestic audiences. Yet, this week’s developments in various areas suggest that the UK Government currently is not inclined to adopt a collaborative and humble approach towards the EU. The Northern Ireland Protocol (NIP) and financial market regulations are two cases in point.
Northern Ireland Protocol
This week, the UK Government unilaterally decided to extend the so-called “grace period” on the introduction of border checks on agri-food products and parcels entering Northern Ireland from Britain. The full set of checks and procedures – agreed between the UK government and the EU under the NIP – was due to be introduced by April, but has now been pushed by the UK to October. Unsurprisingly, the EU’s reaction was robust, calling the move a breach of international law and announced that it would take legal action. The UK’s new “Brexit Minister”, in return, accused the EU of ‘ill will’ insisting that the UK’s unilateral move was in accordance with the NIP.
The continuing issues surrounding the implementation of the NIP stoke further tensions between Unionists and Nationalists in the NI Assembly, but also undermine the UK Government’s credibility in further negotiations with the EU. Thus, the Irish Foreign Minister publicly state that the UK could not be trusted in further post-Brexit talks.
Regulatory alignment with the EU – financial services
One crucial area in which the UK has started initiating important post-Brexit reforms concerns financial services. This week, Lord Hill has published a review of UK stock market listing requirements. The review makes it clear that the main goal of post-Brexit financial regulations is not primarily financial stability, but rather maintaining London’s competitiveness as a global financial centre. Indeed, the review suggests “that it would be helpful if the FCA [the financial Conduct Authority – UK’s financial market regulator] was also charged with the duty of taking expressly into account the UK’s overall attractiveness as a place to do business.” As such, the review has been seen as part of a ‘post-Brexit fightback by the City of London.’
Substantively, the review suggests a series of relaxations of the London Stock Exchange listing requirements. The most consequential recommendations concern the minimal level of free float and dual class shares. Regarding the former, the review suggests that the the number of shares that can be publicly traded and are not held by an insider (‘free float’) should be reduced from 25% to 15%. This implies that the founders of a company can maintain a larger influence over the business after it is publicly listed. Similarly, allowing shares with different voting rights (dual class shares) to be listed on the Premium segment would also implies founders could potentially maintain control over the company by controlling shares with higher voting rights than listed shares. This would allow founders – for instance – to prevent a hostile takeover.
Furthermore, the review suggests relaxations that would make it possible for Special Purpose Acquisition Companies (Spacs) to list in London. Spacs – also referred to as ‘blank-cheque companies – are companies that list on a stock exchange based on a promise to acquire a non-specified private firm and take it public. Spcas have become an important growth market in the US over the past year and the UK government is keen on London becoming an attractive market for such companies.
Taken together these changes would make the LSE a much more attractive place for companies to list – in particular high-growth tech companies which have increasingly chosen Hong Kong and New York over London.
A key question is what the proposed changes would mean in terms of regulatory alignment with the EU, which is key for the UK to obtain recognition as equivalent to EU in regulatory terms and thus maintain access for UK financial service firms to the EU single market.
Lord Hill insists that “this report is not about opening up a gap between us and other global centres by proposing radical new departures to try to seize a competitive advantage. It is about closing a gap which has opened up” (p.10) and that “[i]t makes no sense to think in terms of ‘ripping everything up’ or that we should diverge for the sake of diverging. We clearly need to maintain the high standards of investor protection for which the UK is known” (p.4).
However, reactions to the Hill Review were very mixed. Important investors voiced concern over the weakening investor protections and changes seemingly driven by a rush to participate in the current Spacs frenzy. Indeed, the proposed measures can be considered to shift power from minority shareholders to insiders and thus increasing risks for minority shareholders. As such, the changes may be interpreted as initiating a ‘race to the bottom’ in terms of investor protection.
Be that as it may, the proposed changes clearly deviate from EU regulations, for instance in terms of the recommendations for changes to the prospectus requirements, where Lord Hill freely admits that they “would take us closer to the kind of system we had before the Prospectus Directive and Regulation were introduced in the EU.” Indeed, according to the FT, Sir Martin Sorrell, Founder of S4Capital digital market and advertising business (which has a dual-class share structure), approvingly considered that the review “signals that the government’s ‘Singapore on Thames’ vision for a post-Brexit Britain is on the way to becoming a reality.”
Clearly then, regulatory alignment with the EU does not seem to be a priority for the UK Government, which will almost certainly eliminate any chance of the UK financial market obtaining regulatory equivalence status from the EU Commission. At the same time, the approach is in line with the UK government’s current adversarial rather than collaborative approach to its emerging relationship with the EU in other areas too. This approach, may reflect the fact that the UK Government is confident that its ‘Global Britain’ strategy can work regardless of its impact on the relationship with the EU.