There has been scant divergence from EU financial sector rules in the two years since the UK left the EU. Nor are there many clear future policy proposals. Hence little has changed for Luxembourg players marketing into the UK. Could 2022 be the year when things start to shift?
‘The Benefits of Brexit: How the UK is taking advantage of leaving the EU‘ is the title of the confident-sounding publication released by the UK government on the 31st January, the second anniversary of Brexit. But “thin, watery, tasteless gruel,” is how long-time Brexit advocate and ex-Conversative-MEP Lord Daniel Hannan referred to the contents of the document.
“Most of the gains listed here are aspirational,” he said. “We could scrap the most burdensome aspects of Solvency II, MiFID II and the rest of the EU’s financial services apparatus. But, so far, we haven’t,” he complained. Annabel Denham director of communications at the Brexit supporting Institute of Economic Affairs think tank also complained about “how trivially the government is taking deregulation.”
Ambitious talk
It’s hard to argue with these descriptions, particularly with regard to the highly significant UK financial services industry. The authors of Benefits of Brexit devoted just two of its 108 pages to an industry which generates 8.6% of UK GDP, with little detailed market policy or regulatory changes highlighted.
There was talk of “a programme of sweeping reforms” being underway, and that since the UK government has “taken back control of financial services regulation, we are implementing an ambitious programme of reform.” But there were few specifics other than to point to opportunities to conduct a “once-in-a-generation review to rationalise and streamline retained EU law.”
Some detail
The brochure talks of the “Future Regulatory Framework Review”, the “Wholesale Markets Review”, the “Prospectus Regime Review”, and becoming “a world leader in green finance.” The UK government are also undertaking reviews of Solvency II for the insurance industry and securitisation regulation. Incidentally, the EU is also reconsidering these rules.
More concretely, the document mentions the “Financial Markets Infrastructure Sandbox” which has been established to allow FinTechs to conduct live experiments under a regulatory supervision. In principle this move does appear to go further and faster than the EU, which has plans for a DLT sandbox by 2024. The UK is also moving towards a “Centre for Finance, Innovation and Technology to leverage expertise from across the UK’s regions and accelerate the fintech sector’s growth.”
Change to stay the same?
To encourage long-term infrastructure investment a Long-Term Asset Fund (LTAF) vehicle has been created. The LTAF is comparable to the EU’s ELTIF (European Long Term Investment Fund) which is currently being reformed. “The UK is moving in very similar areas to the EU, but we’ll end up with just slightly different regimes,” noted Charlotte Chopping of Clifford Chance, London speaking at last year’s ALFI PE & RE conference about this new vehicle.
Not mentioned by the Benefits of Brexit paper is a policy highlighted by the UK In A Changing Europe (UKICE) think tank in their ‘UK-EU regulatory divergence tracker.’ They mention the UK’s Greening Finance Roadmap, with its plans for a Sustainability Disclosure Requirement detailing how practices impact the environment. To achieve this they will be assisted with a UK Green Taxonomy. It remains to be seen to what extent these measures will end up being different from the EU’s SFDR and taxonomies. UK government communication on these measures notes it will have “clear focus on the benefits of coherence and compatibility with other international frameworks.”
The UKICE tracker also mentions the review a the wholesale market, regarding the likes of derivatives trading. It says that detailed proposals are awaited and that “it is hard to assess whether these changes will lead to sustained divergence or convergence with the EU because the EU itself is undertaking regulatory reviews.”
Future ideas
While there is little to show so far, could this change in the future? The UK government’s ‘Taskforce on Innovation, Growth and Regulatory Reform‘ published a document in June with some detailed proposals. For example, there are suggested changes to matching adjustment and risk margins in Solvency II, derivatives and position limits in MiFID II, reducing PRIIPS requirements for professional investors and greater flexibility on rules on clearing house margin calculations.
There is also the suggestion of the expansion of Open Banking principles to other financial services, and lighter regulation (including AML) for smaller banks. Also mentioned were aspirations to help pension schemes invest into venture capital and green businesses. It is a matter of opinion whether such changes would amount to the potential for the promised “sweeping reforms”.
Luxembourg waits
Luxembourg financial services businesses serving the UK market are thus waiting for signs of significant change. Mostly things have remained broadly the same, such as the UK’s Temporary Permissions Regime which enables the inbound marketing of EEA-based investment funds until at least the end of 2023. There is also little indication of appetite in the EU to curtail the regulatory ‘equivalence’ of UK-based asset management services for use by EU-based funds.
In the other direction “there were between 90 and 100 financial institutions that relocated activities to Luxembourg,” after Brexit, Luxembourg For Finance CEO Nicolas Mackel told Investment Officer in a podcast interview. “We’ve seen, for instance, three large American banks: JP Morgan, Citi, Goldman Sachs, setting up in Luxembourg their post-Brexit EU wealth management activities.” He also mentioned as a result of Brexit the arrival of the likes of Alipay and 14 large insurance companies.