Brexit update for financial services firms - week ending 27 April 2018

During this week, Andrew Bailey made a speech in support of the UK government’s financial services “mutual recognition” proposals (see the Chancellor’s speech of 7 March 2018) but these ideas were firmly rejected in speeches from the EU side. The EU position is that the future relationship will be based on the EU’s equivalence regime for third countries and not on bespoke mutual recognition arrangements. Detailed analysis of the differences between these two regimes can be found in our report on Brexit and FS in April 2017.

Meanwhile there were the first signs of cooperation between the two sides (between the ECB and Bank of England) in their contingency planning for a “no deal” scenario.

FCA: Speech by Andrew Bailey: Brexit: what does it mean for financial markets to be open?

In this speech given on 24 April 2018, Andrew Bailey discusses the prospects and reasons for a transition or implementation period; and what “the steady state future world” could look like. He advocates mutual recognition over equivalence. Click here to access the speech.

Andrew Bailey uses this speech to advocate, and argue for, the UK’s proposals for the future EU/UK relationship in financial services – as set out in Philip Hammond's speech of 7 March 2018. This involves a bespoke bilateral arrangement for mutual recognition of each side’s rules, based on international standards and equivalent outcomes (without requiring identical rules on each side). The rationale for “bespoke mutual recognition" is that the EU and UK will start with fully aligned regulatory regimes (because the UK is transposing all EU regulation into the UK domestic regime); it would provide much greater access for UK firms than the EU’s regime for third countries.

EC: Speech by Michel Barnier

Text of Michel Barnier’s speech on Brexit given on 23 April 2018, may be accessed here.

Michel Barnier refers to the European Council guidelines (of 23 March 2018) on the future relationship. These refer to a framework for “voluntary regulatory cooperation to encourage convergence of rules” and “an open market for services, where companies from the other party have the right of establishment and market access to provide services under host state rules – I repeat, under host state rules”.

This refers (under WTO/GATS categorisation) to “mode 3” access to EU states (and not to the - all important - access under modes 1 and 2) and without mutual recognition of home state rules. (You can read more about WTO/GATS and modes of supply in our report on Brexit and FS in April 2017.) This access to EU markets is available to all third countries. The European Council has, however, “made clear that, if the UK's red lines were to evolve, the Union would be prepared to reconsider its offer”.

EC: Speech by Michel Barnier

Text of Michel Barnier’s speech on Brexit given on 26 April 2018, follows, in which he sets out the EC’s view on the UK proposals for “mutual recognition” in financial services regulation, stating “the EU is ready to engage in close cooperation with the UK and consider equivalence decisions, where needed … But the UK, which has acknowledged that its current red lines mean losing the financial passport, must also acknowledge that it cannot have the benefits of such passports. And market participants should realise that this will not be business as usual”. Click here to access the speech.

In this speech, Michel Barnier delivers a more specific rejection of the UK’s bespoke mutual recognition proposals. The EU position is that UK access to EU markets will operate under the EU’s existing rule-based regime for third countries – in the same way that countries like the US have access to the EU. This involves free movement of capital (which is applicable to third country movements), rights of establishment under host state rules (as above) and the potential recognition of UK rules under the EU’s third country equivalence regime. He also refers to the notices issued by the EC warning about the effects of the UK leaving the single market in FS – covering asset management, credit-rating agencies, markets in financial instruments, insurance and reinsurance, banking and payment services, statutory audit and post-trade financial services (click here for notices).

EC: Speech by Valdis Dombrovskis

In this speech, given on 24 April 2018, Valdis Dombrovskis discusses aspects of Brexit, particularly with regard to capital markets. Click here to access the speech.

The Vice-President responsible for the Euro and DG FISMA makes reference to Brexit risks – a “no deal” scenario and the question of the future EU/UK relationship in FS. In the context of the former, the EU continues its contingency planning (see for example the notices referred to by Michel Barnier above) and encourages firms to do the same. He says that they believe firms can “alleviate the main risks by repapering contracts and adapting operational models”.

The speech reflects the current EU position that, once the UK leaves the single market, the future relationship will be based on the EU equivalence regime for third countries and the apparent rejection of the UK’s bespoke mutual recognition proposals. He emphasises that its third country regime is based on unilateral equivalence decisions by the EU and not on binding obligations under free trade agreements; even this limited regime is dependent on close regulatory alignment by third countries.

He refers to the development of the EU’s third country equivalence regime, in the context of Brexit and the UK operating as a third country. In some areas the EU is looking at changing and tightening third country treatment – most notably with its controversial proposals for changes to the recognition of third country central counterparties under EMIR. This is an example of how mutual recognition/dual regulation coordination (DRC) can be restricted. He also refers to developments in the MiFID II regime; these include an enhanced assessment of countries with substantial investment business (which presumably would include the UK) in order for their wholesale firms to benefit from the MiFIR third county services passport.

He refers to the limited scope of current equivalence regimes for third countries; this seems to be more of a warning to the UK rather than a hint that the EU might broaden the scope of equivalence regimes.

He also refers to plans to enhance the role of the ESAs (EBA, EIOPA and ESMA) in working with third country regulators and in equivalence assessments. In this context he re-emphasises that even the limited mutual recognition/access available under equivalence is dependent on close alignment of rules and would be at risk if rules diverged.

BoE/HMT/EC: Technical working group on risk management in financial services

The EC and HMT have asked ECB and BoE to convene a technical working group on risk management in the period around 30 March 2019 in the area of financial services, to be chaired by Mario Draghi and Mark Carney. It is noted that the EC and HMT will attend as observers and other relevant authorities will be invited on an issue-specific basis. It is also stated that this technical work is separate from negotiations on the Withdrawal Agreement and from the negotiations on the overall understanding of the framework for the future relationship between the EU and the UK. Details may be accessed here.

This announcement, which is very brief, is the first official/new channel for UK/EU coordination on risk management for a Brexit “no deal” scenario in late March 2019. This will be a technical group and it will look at the risks in the area of financial services.

The working group will no doubt look at areas such as the loss of authorisation of EU firms (in the UK) and of UK firms (in the rest of the EU/EEA), the servicing of uncleared OTC derivative contracts and the position of pre-Brexit insurance policies written on a cross-border basis. It could become a vehicle for parallel recommendation of legislative/contingency measures by both the UK and the EU. In the UK, HMT has already announced certain measures on a unilateral basis – see the December statement on temporary permissions for EU firms. The EC is also understood to be working on legislative proposals for a ‘no deal’ scenario including emergency powers in the FS sector.

FCA: Speech by Andrew Bailey: Asset management: A regulatory perspective

Text of Andrew Bailey's speech given on 26 April 2018 follows, in which he discusses challenges for the asset management market and regulatory developments in the sector. Specific areas discussed include: changing demographic patterns and the interaction with macroeconomic conditions; Brexit; ETFs; open-ended funds; EU legislation and fintech. Click here to access the speech.

Andrew Bailey refers to Brexit in the context of the asset management industry and the critical issue of delegation. He emphasises the global importance of delegation in asset management and warns the EU against pursuing a protective/restrictive policy – no doubt with recent publications from ESMA and the EC in mind.

HMT: Brexit – responsibilities of UK regulators SI

TSC has published the text of a letter from HMT dated 18 April 2018 with regard to the SI, which provides background detail and a copy of the SI. Click here to access the letter.

Our previous update for the week ending 20 April contains a detailed report on this topic.

Other publications from the RegZone Brexit news feed

EIOPA: Supervisory convergence plan

EIOPA’s supervisory convergence plan for 2018/2019 for the insurance sector, focuses on the implementation of Solvency II and conduct of business supervision. Future work includes: monitoring the potential consequences of Brexit. Click here to access the plan.

HoL Delegated Powers and Regulatory Reform Committee: EU Withdrawal Bill

In two reports published this week, the Committee draws attention to a number of the amendments made for Report Stage of the Bill. Click here to access the reports.

BIS: Speech by François Villeroy de Galhau: France and Europe economic developments, reforms and attractiveness

Text of this speech, given on 25 April 2018, follows. Topics include: the attractiveness of Paris as an integrated financial centre in a post-Brexit world. Click here to access the speech.

PAC: Exiting the EU and DBEIS

The Committee has published a report criticising DBEIS for its Brexit preparations. Click here to access the report.

HoC: A UK/EU customs union?

This HoC briefing paper was prepared for the Government debate on 26 April 2018 and may be accessed here.

HoL: European Union (Withdrawal) Bill

Transcripts of the report stage of the Bill have been published and are available here. Amendments discussed covered clauses 7-8 of the Bill. The next day of report stage is scheduled for 30 April 2018.