It is over a year since the end of the transition period that saw Brexit come into full effect and as regards financial services regulation, the UK still appears to be searching for a new direction. Or maybe this is the plan. Could the strategy be to talk about change for a domestic political audience, while keeping real divergence to a minimum?
Kerstin Mathias (pictured), Regulatory Affairs and Policy Director with the City of London Corporation, speaking at the Building Bridges With The UK webinar hosted by Luxembourg For Finance, was not able to give much concrete information about how UK financial regulation is about to change post-Brexit. As one might expect from a representative of the City of London Corporation – the municipal governing body of the London financial centre – she offered her support to the overarching themes of the speech given by the UK finance minister in the City last summer, in which he called for openness, competitiveness, being technologically advanced and supporting sustainable finance.
Aspirational talk
Yet Mathias was keen to downplay talk of the UK and the EU’s financial regulatory regimes diverging. “Rather think about it as parallel evolution as the UK and the EU regimes adapt to new and emerging challenges,” she said. “Both of our regimes are evolving. And as they do, it’s really important that we keep the dialogue going,” she added.
Few could disagree with these high-level notions, nor the UK government’s “strong commitment to international standards,” with “established financial markets such as the US, Japan, Singapore, but of course, also the EU”. She also mentioned the desire for “a balance between interdependency and having the right accountability and scrutiny frameworks.”
Legislation expected this year
Yet what will be the practical manifestation of this wish list? “We expect the UK Government to legislate for all of this in the Financial Services Bill in the second half of this year,” she said. She also mentioned the on-going “Future Regulatory Framework Review.” It is perhaps telling that despite the relatively short timetable, and the City of London Corporation’s good connections with decision makers, Mathias was unable to indicate clear signs of the UK diverging from legacy EU legislation.
Rather, much of her messaging was about how little things would change. For example, on the UK government’s “so-called growth and competitiveness objective” for regulation this is not perceived by Mathias as “an attempt for a race to the bottom.” As regards how the legacy EU laws brought into UK law would change, she believes “this will be a multi-year process.” She also added that “it is not for parliament to really set the detailed rules but to make sure there’s sufficient oversight.” This appears to be a call for regulations to be decided on a technocratic basis, rather than being in the hands of vote-seeking parliamentarians.
Similar on ESG
A case in point is the UK government’s attitude to sustainability regulation. Their “Roadmap for Sustainable Investment” published in October 2021 talks of the need for sustainability disclosure requirements and a green taxonomy. The identical structures seen in the EU. Moreover, “the UK Government has established the Green Technical Advisory Group to advise the UK Government on how to adopt the EU taxonomy for UK purposes,” Mathias said, adding “it is really notable that in principle, the approach will be the same as the EU’s.” However, she said product classification might differ, as it would seek to follow IFRS and IOSCO standards.
A clear area of divergence, however, has been how limits on the free movement of labour “had a huge impact on the amount of EU talent in the UK. “We’re working really hard to make some positive changes here,” and she has hopes for liberalisation as in these rules this year. “There will be a new global business mobility rule,” she said.
The potential to diversify on the Solvency II rules for the insurance industry is often cited by Brexit enthusiasts as a chance for the UK steal a march on the EU. However, Mathias said: “I really do think this is an area where the EU and the UK are aligned with what they’re trying to achieve. There is a shared ambition to free up capital for long term investment by insurers, and I know both jurisdictions are looking at that.”
Win win for Luxembourg?
This scenario could be an ideal situation for Luxembourg. Brexit has sowed sufficient doubt in the mind of executives to cause businesses to seek an EU hub. Yet if UK-EU regulations diverge little and there is de facto equivalence of some UK-based providers, this would mean that what LFF CEO Nicolas Mackel called the “symbiotic relationship between Luxembourg and London” could be set to continue largely unhampered.