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After Brexit Vote, Many Questions, Few Answers

The UK’s decision to leave the European Union leaves many issues unresolved for securities regulators and accounting standard-setters. If the UK’s exit includes a departure from the Continent’s regulations, then agencies such as the Financial Conduct Authority and the Financial Reporting Council, which sets UK GAAP for privately held companies, are the most likely candidates to assume responsibilities that have been with the European Commission’s directorate general for capital markets union and financial regulation.

The decision by 17. 4 million UK voters on June 26, 2016, to leave the European Union leaves many issues unresolved for securities regulators and accounting standard-setters.

At this stage, it still has to be determined what will change and how long the changes will take to implement. Spokespeople for bodies including the IASB, SEC, and PCAOB said they were still studying the issue and either had no comment or could do little more than describe some of the steps that would have to be taken, such as a renegotiation of existing international agreements, before they could say how the post-Brexit regulatory landscape will look.

“We have a period now where there’s a lot of uncertainty,” said an IASB spokesperson.

“The AICPA will monitor the situation and provide members with information and resources to help them understand the implications of this referendum in areas such as talent, foreign investment, regulatory issues, trade and supply chains, as well as how it may affect U.S. and global markets,” said AICPA President and CEO Barry Melancon in a statement.

As things stand now, the UK government that negotiates Britain’s EU exit will have to determine what its future dealings with the European Commission will entail. Jonathan Hill, the European Commissioner for financial regulation and a political ally of departing Prime Minister David Cameron, announced his resignation on June 25, a day after Cameron said he will step down in October. Hill’s responsibilities are being assumed by Valdis Dombrovskis, an EC vice president who also supervises the euro.

UK businesses, particularly in the financial and professional services sectors, are expected to push hard for continued access to Europe’s markets, which would mean a continuation of the EU’s regulatory regime and little disruption to the use of IFRS in the UK. But to bring that about, the UK will have to accept unrestricted emigration, and the Leave vote was largely spurred by anti-immigrant fears.

If the UK’s exit includes a departure from the Continent’s regulations, then agencies such as the Financial Conduct Authority and the Financial Reporting Council, which sets UK GAAP for privately held companies, are the most likely candidates to assume responsibilities that have been with the European Commission’s directorate general for capital markets union and financial regulation. The directorate is responsible for the approval of IFRS in EU member nations. With the Brexit, the Financial Reporting Council may take on responsibility for the use of IFRS in the UK, but a spokesperson for the council was unwilling to say that such a move was definite.

“There are an awful lot of issues that will need to be worked through, and at this stage it’s all very early days. We will look for direction from the government in Parliament as to how it wants to proceed,” said a spokesperson for the council.

“We don’t know how financial services will be integrated in any new, future renegotiation,” said a spokesperson for the EC’s capital markets directorate. “It’s totally pointless speculating, and it’s going to be months of uncertainty probably.”

Much, in terms of the UK’s post-Brexit regulatory regime, will depend on the deal the British negotiate for themselves with the EC.

“Everything hinges on whether it will negotiate something whereby it still has access to the single market, in which case, broadly, probably no change,” said the capital markets directorate’s spokesperson. Anything short of a seamless continuation of the status quo could lead to a lengthy, and more unpredictable renegotiation.

The future of the UK’s agreements with U.S. regulators is also in flux. Both nations have a vested interest in continued access to one another’s markets, but the terms will have to be renegotiated. In the case of the PCAOB, its existing information-sharing and cross-border inspection agreements in Europe have to conform to broader EU data privacy rules.

The PCAOB actually had a bilateral agreement with the UK as one of its first international pacts, but that deal had to be renegotiated after the EU adopted its current data protections. Now the UK deal may have to be renegotiated again.

The large audit firms, for their part, noted the risk involved with the UK’s decision and said their firms were ready to assist clients with the changes.

PricewaterhouseCoopers LLP’s UK practice issued a series of statements on its expectations for a number of industries. For audit regulation, PwC forecasts limited changes.

“In or out of the EU, the focus must still be on improving audit quality, confidence in auditors, competition, and ensuring auditor independence,” said Gilly Lord, the firm’s head of regulatory affairs. “In the long-term, we could see some changes in the rules as the UK forges its way through its new landscape, but it’s likely that the UK would continue to apply much of the European regime in order to maintain market access.”

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