Divergence in the city – Lexology
With the signing of the EU-UK Trade and Cooperation Agreement and Brexit increasingly becoming an established fact, areas of potential divergence between the UK and the EU are becoming clearer. The strategy appears to be to identify areas where the UK already has a competitive advantage over its rivals, and then figure out how to use the UK’s new position to stretch that advantage. A key area is, of course, the financial services industry.
Some had hoped that the post-Brexit memorandum of understanding reached between the EU and the UK at the end of March would result in an EU decision to return the UK position on equivalence, thereby granting companies UK-based financial services provider the ability to continue doing business with EU clients as they did before the UK left the EU. It didn’t work that way: The EU is reluctant to grant London extended equivalence, arguing it lacked certainty about the UK’s regulatory intentions. In the end, the creation of a joint UK-EU financial regulation forum to discuss regulation of the sector, one of the few strong elements of the MoU, fell far short of the hoped for legally binding cooperation agreements. by the United Kingdom.
The EU wants to relocate more of its financial services currently located in London, in part to reduce the stability risk of having a large part of its financial services industry located outside its borders and in part to fulfill its vision of the markets capital. The EU sees equivalence as the methodology by which third countries access the EU: withholding equivalence effectively creates facts on the ground as financial services companies enter the EU so that they can continue to serve customers in the EU – once companies enter the EU, the camp is less likely to return to the UK.
The UK also recognizes that – even if equivalence is eventually granted – some of the damage already done is irreversible and is considering how and where the UK can extend its competitive advantage in the sector. The first irony is that the weakness of the MoU may mean that, far from being an alignment framework, it could become the roadmap to a managed divergence.
Responding to EU concerns that the UK’s well-respected independent regulator could come under political and economic pressure to lower standards in order to seek a competitive advantage, FCA stressed that its aim was to undertake a genuine legislative cost-benefit analysis. To the extent possible, the UK will avoid making changes where implementation costs have already been incurred and will seek to avoid, or at least reduce, expenditure related to the obligation for companies to operate. comply with two regulatory / reporting regimes. However, where the balance relies heavily on costs rather than benefits, the Financial Conduct Authority (FCA), the Treasury and the Bank of England may see Brexit as an opportunity to rewrite the regulation concerned.
This suggests a possible comprehensive review of financial services regulation to identify areas where a divergence would benefit the UK as a whole. The second irony is that such an outcome (an indirect consequence of the EU’s decision not to grant equivalence) would give substance to the EU’s hesitation over London’s regulatory intentions.
Brexit as a force for change …
The UK doesn’t see divergence or convergence as a strategic goal, but Brexit will force (or allow) the City to decide how to build on its strengths.
In a speech in March, Edwin Schooling Latter, head of markets policy at the Financial Conduct Authority, said the UK is already considering regulatory changes in a number of areas. He developed the criteria that could be used to make this assessment during his testimony to the Treasury Committee on the future of financial services on April 26. The process of upgrading EU financial services legislation would offer the possibility of removing these elements from the regulatory framework, where “the current level of complexity is not fully justified”.
The FCA initially appears to be focusing on relaxing two EU regulations – the Securities Financing Transactions Regulation (SFTR) and the Central Securities Depositories Regulation (CSDR). But a revision of the Markets in Financial Instruments Directive (MiFID) also appears in the scope. And FCA CEO Nikhil Rathi suggested that Brexit could be used to strengthen individual protections in areas such as making online publishers accountable for ad content under the financial promotion scheme and increasing compensation for victims of scams.
UK financial regulators are keen to identify how to update settlement agreements to support both market liquidity and settlement efficiency. They indicated their willingness to look at the broader framework of capital markets. The UK has indicated that it will consult on changes to MiFID II rules to assess whether the costs imposed by the rules have (or not) achieved the desired benefits and, for example, whether there are any gains in Potential efficiencies could be achieved by improving the alignment of the prospectus documentation requirements with the actual business transaction.
Lord Hill’s review of the UK financial services sector made a number of other recommendations for changing UK listing rules, including on free float, two-way equity structures. classes and Special Purpose Acquisition Companies (SPAC). The FCA is currently reviewing its response to these recommendations.
Difficult times …
The EU and UK will need to make their MoU work and prioritize close cooperation to maintain as much alignment as possible and thus reduce disruption for financial services companies operating in both jurisdictions and destabilizing regulatory fragmentation. The more the UK diverges to emphasize its competitive advantage in the sector, the more difficult this job will become.
As the EU and UK develop their future financial services relationship and begin to integrate their thinking on how the sector is supporting the energy transition, the joint team of regulatory and policy experts Covington Public Services is uniquely positioned to help clients navigate these new and potentially difficult waters. .