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Will the UK’s #Brexit plans kill London?

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It was interesting reading as the UK issued its Brexit plan last Thursday.

A 98-page white paper outlines the details of what Britain is asking for in leaving the European Union. Most of it is unworkable, but then Brexit itself is likely unworkable. After all, no MPs can agree what they want out of Brexit; many are at extremes against each other; any agreement they make is likely to be broken; and any agreement they make is likely to be disagreed with by the European nations. So, Brexit is a mess. Yes.

Donald Trump says that the closer the UK is aligned with EU after Brexit, the less likely the US is going to make a trade deal with the UK; and the City slammed the plans for not including a “mutual recognition” system but going for an equivalence regime instead.

Equivalence versus Mutual Recognition

Equivalence allows the UK to set its own rules and, where appropriate, make them equivalent to the rules of the EU. That is an uncertain future as the rules may be equivalent one day and not the next, which means that passporting is not allowed as the regulations may differ. A mutual recognition system ensures the rules are kept the same, which means that passporting may be achieved because the regulations are known to be the same.


Here’s what the Government’s white paper says about financial services:

“New arrangements on services and investment that provide regulatory flexibility, recognising that the UK and the EU will not have current levels of access to each other’s markets, with new arrangements on financial services that preserve the mutual benefits of integrated markets and protect financial stability, noting that these could not replicate the EU’s passporting regimes …”

Followed by section 1.3.4 specifically on Financial Services:

The UK and EU financial services markets are highly interconnected: UK-located banks underwrite around half of the debt and equity issued by EU businesses; UK-located banks are counterparty to over half of the over-the-counter interest rate derivatives traded by EU companies and banks; around £1.4 trillion of assets are managed in the UK on behalf of European clients; the world-leading London Market for insurance hosts all of the world’s twenty largest international (re)insurance companies; and more international banking activity is booked in the UK than in any other country. This interconnected market has benefits for consumers and businesses across Europe. For example, one study has found that if new regulatory barriers forced the fragmentation of firms’ balance sheets, the wholesale banking industry would need to find £23-38 billion of extra capital. These are costs that would ultimately be borne by consumers and businesses.

This interconnectedness also highlights the UK’s and the EU’s shared interest in financial stability. The UK is host to all 30 global systemically important banks and is the home regulator for four of them. Given its scale, the International Monetary Fund (IMF) has described financial stability in the UK as a “global public good”. Alongside its European partners, the UK has developed an institutional framework to manage financial stability while ensuring the regulatory system supports a global financial centre.

As the UK leaves the EU and the Single Market, it recognises the need for a new and fair balance of rights and responsibilities. The UK can no longer operate under the EU’s “passporting” regime, as this is intrinsic to the Single Market of which it will no longer be a member.

In addition, given the importance of financial services to financial stability, both the UK and the EU will wish to maintain autonomy of decision-making and the ability to legislate for their own interests. For example, in some cases, the UK will need to be able to impose higher than global standards to manage its financial stability exposure. In other areas, the UK market contains products and business models that are different to those found elsewhere in the EU, and regulation would need to reflect these differences. The decision on whether and on what terms the UK should have access to the EU’s markets will be a matter for the EU, and vice versa. However, a coordinated approach leading to compatible regulation is also essential for promoting financial stability and avoiding regulatory arbitrage.

The EU has third country equivalence regimes which provide limited access for some of its third country partners to some areas of EU financial services markets. These regimes are not sufficient to deal with a third country whose financial markets are as deeply interconnected with the EU’s as those of the UK are. In particular, the existing regimes do not provide for:

  1. institutional dialogue, meaning there is no bilateral mechanism for the EU and the third country to discuss changes to their rules on financial services in order to maximise the chance of maintaining compatible rules, and to minimise the risks of regulatory arbitrage or threats to financial stability;
  2. a mediated solution where equivalence is threatened by a divergence of rules or supervisory practices;
  3. sufficient tools for reciprocal supervisory cooperation, information sharing, crisis procedures, or the supervision of cross-border financial market infrastructure;
  4. some services, where clients in the UK and the EU currently benefit from integrated markets and cross-border business models. This would lead to unnecessary fragmentation of markets and increased costs to consumers and businesses; or
  5. phased adjustments and careful management of the impacts of change, so that businesses face a predictable environment.

In this context, the UK proposes a new economic and regulatory arrangement with the EU in financial services. This would maintain the economic benefits of cross-border provision of the most important international financial services traded between the UK and the EU – those that generate the greatest economies of scale and scope – while preserving regulatory and supervisory cooperation, and maintaining financial stability, market integrity and consumer protection.

This new economic and regulatory arrangement would be based on the principle of autonomy for each party over decisions regarding access to its market, with a bilateral framework of treaty-based commitments to underpin the operation of the relationship, ensure transparency and stability, and promote cooperation. Such an arrangement would respect the regulatory autonomy of both parties, while ensuring decisions made by either party are implemented in line with agreed processes, and that provision is made for necessary consultation and collaboration between the parties.

As part of this, the existing autonomous frameworks for equivalence would need to be expanded, to reflect the fact that equivalence as it exists today is not sufficient in scope for the breadth of the interconnectedness of UK-EU financial services provision. A new arrangement would need to encompass a broader range of cross-border activities that reflect global financial business models and the high degree of economic integration. The UK recognises, however, that this arrangement cannot replicate the EU’s passporting regime.

As the UK and the EU start from a position of identical rules and entwined supervisory frameworks, the UK proposes that there should be reciprocal recognition of equivalence under all existing third country regimes, taking effect at the end of the implementation period. This reflects the reality that all relevant criteria, including continued supervisory cooperation, can readily be satisfied by both the UK and the EU. It would also provide initial confidence in the system to firms and markets.

Although future determinations of equivalence would be an autonomous matter for each party, the new arrangement should include provisions through the bilateral arrangement for:

  1. common principles for the governance of the relationship;
  2. extensive supervisory cooperation and regulatory dialogue; and
  3. predictable, transparent and robust processes.

The issue at the heart of the matter here is equivalence versus mutual recognition. As the Financial Times reports:

Catherine McGuinness, policy chairman of the City of London Corporation, described the government’s white paper proposals, which abandoned a “mutual recognition” plan that would have seen the UK and EU mirror each other’s financial regulations, as “a real blow for the UK’s financial and related professional services sector”. She added that the EU’s equivalence regime, which allows foreign countries such as the US to sell some financial services across the EU, as “not fit for purpose” in its current form.

Another lobby group, TheCityUK, said it was “regrettable and frustrating” that mutual recognition “has been dropped before even making it to the negotiating table”.

Equivalence’ is untenable according to those in the know, like Kay Swinburne, MEP Member of Economic and Monetary Affairs:

“Kay was adamant that equivalence would not work, retail markets would lose all passporting rights, and that the UK would not be able to access EU citizens’ data. This would severely restrict London-based FinTechs that want to offer EU services, but all they need to do is register for a bank licence in a light subsidiary in, say, Estonia, and then they can still passport and access data regardless.”

The key issue is that equivalence means we drop passporting rights for banks to operate from London, across Europe. The fact that the government has dropped what would have kept this – mutual recognition – is the big issue. Interesting to see that we’ve not even tried to keep passporting from the get-go. Shame.

Mind you, at least the UK will be the first European nation to be on the blockchain. Page 18 (Section 1.2.1, 20):

The UK will take into account the views of third countries, to ensure that the UK’s tariff offer is as valuable to them as possible and to continue to
explore options to use future advancements in technology to streamline the process.

This could include looking to make it easier to allow traders to lodge information in one place. This could include exploring how machine learning and artificial intelligence could allow traders to automate the collection and submission of data required for customs declarations.

This could also include exploring how allowing data sharing across borders, including potentially the storing of the entire chain of transactions for each goods consignment, while enabling that data to be shared securely between traders and across relevant government departments, could reduce the need for repeated input of the same data, and help to combat import and export fraud.

OK, I knew it. We can have a successful  break with Europe, as long as distribute transactions in a shared ledger which machines can learn from. Done deal!

Chris Skinner Author Avatar

Chris M Skinner

Chris Skinner is best known as an independent commentator on the financial markets through his blog,, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...

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