Whenever the ‘merits’ of aligning UK regulations with those of the EU after Brexit are discussed, the fate of the financial services sector features prominently.
I recently gave evidence to the House of Commons International Trade Select Committee on the economic effects of trade policy, alongside my Economists for Free Trade colleague Patrick Minford. As written evidence, I submitted ‘Brexit and the City’ which considers various options.
The main choice is between equivalence and mutual recognition – and this would cover both the services themselves and the qualifications of those providing services. However, in the absence of an agreed solution with the EU, there is growing support for World Financial Centre model, where the City ‘goes it alone’.
I discussed the following seven different possible models with the Committee.
Enhanced equivalence model (proposed by Barney Reynolds from Shearman & Sterling)
A ‘third-country equivalence regime’ is permissible under the EU’s MiFID II legislation which came into force in January 2018. This covers the entirety of investment businesses, including banks doing their investment business. There are also numerous other existing equivalence regimes for sectors of the financial services industry. Barney Reynolds proposes an ‘enhanced equivalence’ model, under which the gaps in existing equivalence regimes are filled in and regulations are accepted as being sufficiently similar, but without actually being identical.
There would be two key issues to resolve during the Brexit negotiations: the EU and UK agree to treat each other fairly in assessing rules as being equivalent; and they would agree terms on which equivalence can be withdrawn without political interference.
Enhanced equivalence would allow the UK to: remove the most unnecessarily onerous requirements of EU legislation (while maintaining equivalence determinations); move away from the EU’s process-focused approach to one based on outcomes; re-draft laws in common law style, which would bring with it far greater legal certainty by removing the so-called ‘purposive’ method of interpretation; and move away from poor European Court of Justice decision making in the financial services context, given that ECJ reasoning is insufficiently focused on fact-based analysis to provide the clarity that the common law brings.
The EU has negotiated equivalence-based arrangements with the US for the most systemically risky portion of the market, clearing houses. Further, the EU is committed to free capital movement through the Maastricht Treaty and the European Central Bank has signed up to the Bank for International Settlements rules on creating a level playing field for all providers of financial services.
The UK also supports these objectives. Further, in December 2017, the Bank of England’s Prudential Regulatory Authority proposed permitting EU banks to convert to third-country branches in the UK.
A leaked draft of an annex to the EU’s Guidelines for negotiating a future trading relationship with the UK suggests the EU might be willing to offer ‘improved equivalence mechanisms’ to cover financial services.
To read Professor David Blake’s piece for BrexitCentral in full, click here.