Review suggests UK might be hedging its bets on equivalence
There is a high stakes game afoot over how the UK’s financial services will be regulated in a post-Brexit world. At stake is equivalence, whereby the configuration of regulations in the UK and EU are as stringent as each other (or near enough). This would mean that cross-border trade and exchange could occur on a level playing field and, from a regulatory perspective, where neither party has a competitive advantage. By Ben Blackett-Ord, founder and chief executive, Bovill
Equivalence matters. You only need to look at the recent uproar on EU clearing to understand the potential impact that divergence can have on UK financial services and the overall stability of the financial system. The UK’s euro-denominated clearing service is one of only two areas where agreed equivalence has been preserved post-Brexit, albeit with only a temporary reprieve.
London clearing houses, and City lobby groups, have been pressing for the deal to remain in place past its timetabled cut-off in June 2022. The concern is that markets will grind to a halt should there not be an extension, with the Bank of England warning that the EU must consider the risk of financial instability in the event of fragmentation. Getting this right is key to the competitiveness of the UK and its pre-eminence as a centre for financial services. Billions of dollars in trading have already left the London markets in search of a more certain regulatory environment.
The negotiations are a complex game. Right now the EU has gone quiet on equivalence and is not currently entertaining any dialogue or further negotiations. On the other side of the Channel, HM Treasury is playing hardball. UK Chancellor Rishi Sunak is taking the stance that the time for talking is done, that we must now go our own way on regulation and mould our rules in a way that suits the UK, allowing us to compete in a global marketplace for financial services.
Although they concede that conversations have stalled, counterparts in regulators such as the Prudential Regulation Authority and the Financial Conduct Authority have been less pugnacious. In a letter to Mr Sunak, Bank of England governor Andrew Bailey said: “The UK’s reputation for strong standards, independent regulation and financial stability has been and will remain a crucial component of its attractiveness to internationally active financial institutions.”
Frustration with EU
However, that is not to say there is no creeping frustration with the EU’s stance. On the clearing equivalence issue, Mr Bailey commented: “I have to say to the EU, we make it work with the US, you make it work with the US, the same principle and practice applies. I’m just not prepared and do not understand the argument that somehow the UK-EU relationship should be different.”
Despite frustration and HM Treasury’s strong rhetoric on going it alone, if we read between the lines of their recent wholesale markets review, we get a sense of the direction of travel being sought.
The consultation paper, part of the government’s new chapter for financial services, is revealing, but mainly for what it does not deliver. In conversations around the build-up, the plan was thought to be an ambitious one. However, despite the aims, there is actually little of substance. A few tweaks of the approach to the Markets in Financial Instruments Directive (MiFID) II aside, the proposed changes are not groundbreaking. Instead, the approach looks cautious.
And this might be the giveaway; the ‘tell’ in Mr Sunak’s game. There is much sabre-rattling about going our own way and setting our own rule book to allow us to compete. But there is little in the Treasury’s wholesale markets review to suggest this type of divergence will happen. A wholesale markets review it might be, but a wholesale rewriting of the rules it is not. Instead, we are treading closely to what exists already, a kind of ‘equivalence lite’. We’re changing slightly, but not so much that we cannot meet equivalence requirements and fall in with the EU rulebook should needs require it. And with the European Commission’s MiFID II review due later this year, it will be worth reflecting on whether Europe takes a similar approach.
However, there will remain areas where the UK continues to regulate with little alignment to our EU counterparts. A good example of this is financial promotions, where we tend to see things differently. Such departures need not impede equivalence, however, as we initially navigated the different approach while still in the EU: financial promotions rules in the UK have been in place since the introduction of the Financial Services and Markets Act in 2005. Equivalence clearly does not mean all rules have to be the same. It is a malleable concept.
The endgame on how we regulate our financial services will play out over the months and years ahead. However, what we are seeing is that the direction of regulatory travel in the UK appears to be one in which we are willing to hedge our bets and keep equivalence in play.
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