Expert View

Why does the City becoming a rule-taker matter?

by Mark Boleat | 30.05.2018

Mark Boleat is a commentator on public policy issues, specifically Brexit, finance and housing.

The Bank of England and the Treasury are clashing on the future of City regulation post-Brexit, according to yesterday’s FT. The Treasury is giving priority to market access and the Bank to financial stability.

Relations are probably not as bad as the article suggests. But the Treasury and the Bank have different principal interests – tax revenue and employment for the Treasury and financial stability for the Bank.

Currently there are three possible outcomes of the Brexit negotiations on financial services:

  • No special arrangements, in which case Britain becomes a third country with very limited access to the EU under existing “equivalence” arrangements, which don’t even cover huge swathes of the financial services industry.
  • An enhanced equivalence regime, covering more sectors and being less one-sided.
  • Mutual market access, under which Britain and EU would jointly agree to accept each other’s regulatory systems even if they were different.

With equivalence as it now stands Britain would have to satisfy the EU that its arrangements are “equivalent” to those of the EU. The process is as much political as regulatory, and the status can be withdrawn at 30 days’ notice. And, of course, post-Brexit the EU’s regime could be changed in a way that did not suit the UK and we would have no choice but to change our own arrangements to remain equivalent. 

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Equivalence cannot be confined to businesses operating internationally. In effect, it means that businesses that do not operate in the EU would be subject to rules made by the EU. Understandably, British regulators could not accept this. They would in effect lose control of regulation.

An enhanced equivalence regime could partially address this issue – depending on the degree of enhancement. The “30 day” rule could no doubt be modified, and consultation arrangements put in place. However, the scope of the equivalence regime cannot be widened without a number of directives, which would be a lengthy process. And the final decision on whether our rules were equivalent would remain with the European Commission.

The mutual market access option is logically coherent. But, by all accounts, it is simply not acceptable to the EU as it would give the UK greater influence than a member state would have, and it does not fit into how the EU works.

The probable end result will be an enhanced equivalence regime, but with little enhancement. This may work for a few sub-sectors of the finance industry, but it will not provide market access for most banking and insurance services.

The longer the debate goes on without a firm decision the less relevant it is. The financial services industry is generally working on the basis of a hard Brexit on 29 March 2019. The transition agreement is just a statement of intent and has no legal standing.

In these circumstances, regulated financial institutions, influenced by their lawyers, customers and regulators, must assume a worst-case scenario, and they are getting on with it. In most, but not all, cases they will assume that if they want to do business in the EU post-Brexit this will be through a corporate entity authorised and regulated in the EU27 and with full passporting rights.

Edited by Hugo Dixon

One Response to “Why does the City becoming a rule-taker matter?”

  • All this leads one to believe that we are heading towards one of three things: crashing out on the 29th of March; withdrawing Article 50 Notice before then, probably on the 28th and staying in; or, coming out on the 29th but effectively staying in without voting rights. No one needs me at this stage to list the pitfalls of crashing out or Brexit in name only, but it seems the only sensible option is withdrawing Article 50. Strangely, it is the least damaging and least-discussed option. Given the Government’s lack of policy and lack of preparation, leaving on the 29th, hard-Brexit style, is off the table. Leaving without voting rights would be the cowards’ way out. I think serious consideration and a push towards revocation of Article 50 will start soon, hopefully with the Best for Britain campaign.

    If that happens it’ll be: “Brexit: been; there done that; it were crap!”