EU-UK relations regarding financial sector regulation are liable to be fraught and driven by political considerations over the medium term. A Luxembourg For Finance (LFF) seminar on 23 February explained why equivalence measures, and the planned MoU on regulatory cooperation, cannot replicate the access and predictability of a full financial services passport.
‘Equivalences will help, but I would not say that they can be depended upon to be a solution,’ said Patrick Geortay (pictured), national managing partner of Linklaters Luxembourg. He was referring to the decisions which would grant access to the single market UK-based players and services deemed to be operating in line with EU regulations. ‘It’s really a temporary fix rather than something that is supposed to be permanent,’ he said.
Equivalence stop-gap
The problem stems from the Trade and Cooperation Agreement which underpins the Brexit treaty being silent on financial services. Without this legal foundation, future arrangements are dependent on day-to-day decisions by politicians and regulators. Geortay also noted how one-sided the discussion will be, with the EU assessing the current and future status of UK standards.
Moreover, granting these equivalences will take time, and even then these could be removed in weeks. So far, two equivalence measures have been granted on derivatives clearing and settlement of Irish securities, but both are time-limited. Around 40 regimes are liable for this treatment, such as functions like deposit taking and lending. Yet a bank might be unwise to base their business on such core activities being permitted to flow across the English Channel long-term.
Low trust
Expectations are also low regarding the ongoing discussion about a memorandum of understanding (MoU) on information sharing and dialogue on the regulatory environment. All these discussions can ‘create and build trust between the two parties, but I don’t think that there will be a very big push in the coming months,’ said Geortay.
Trust and how politics works to build or erode this could be a key. ‘For the true believers, a good Brexit is one that keeps the grievance alive; that makes foreigners the scapegoat for bad government,’ is the pessimistic assessment of the UK political commentator Raphel Baer. This view is backed by the UK-based analyst Mujtaba Rahman, who sees the belligerent tone from London leading to ‘moderate EU capitals & voices becoming a minority.’ Others hope that, as in the past, the Johnson government’s harsh words on UK-EU relations will be followed with mild action.
Luxembourg calls for calm
Luxembourg appears to be one of those capitals counselling caution. ‘We should look to avoid using the exit of the United Kingdom as a pretext to build fortress Europe,’ Pierre Gramegna, the Luxembourg finance minister, said at the webinar. ‘Let’s not close the EU single market for financial services, let’s try to make it prosper so that it can be attractive for outside investment from all over the world,’ he added. As for ongoing dialogue, he called for this to be ‘structured and regular to give all actors the necessary predictability’.
That said, if the walls are to go up, Gramegna is keen to present the advantages of a Luxembourg base from which UK players can access the EU market. He put at 70 the latest tally of financial services firms to have moved to the Grand Duchy in the context of Brexit. LFF CEO Nicholas Mackel was keen to point out that this process had been managed with ‘hardly any hiccups’. This is despite 86% of webinar viewers saying in a straw poll that cross-border business had become more complex post-Brexit.
Private banking case study
A case study of how these challenges were confronted in the wealth management sector was described by Gregor Bollen, region head northern Europe at Citi Private Bank. ‘We’ve had to move the team that was providing advice to our private banking clients from London to Luxembourg,’ he said. The EMEA headquarters and 8,000 staff have remained in the City, with other activities going to Frankfurt.
‘Everything that has to do with advising clients: bankers, investment counsellors, and others all had to move away from London, and we brought them all to Luxembourg.’ The City remains the hub for product specialists and strategists because ‘it’s better to have them together rather than to break everything apart.’
To keep disruption to a minimum, they booked clients in Citi’s Dublin-registered bank, and then set up a branch of the Ireland office in the Grand Duchy. This work was completed about a year ago and ‘there was very little, if any, client resistance of moving the accounts from London to Luxembourg.’
In asset management, a range of techniques have been used, noted Noel Fessey, CEO of European Fund Administration. Luxembourg has been favoured for moving funds, opening fund management companies, and even the creation of entities with Mifid licences.
Substance
‘All of this demands a degree of substance as a necessary condition for getting the authorisations,’ he noted. Regulators are on alert to spot operations seeking to circumvent the rules by using under-powered offices. ‘You have to be very careful about how much you lean on your London group when seeking to deliver a convincing story to your regulator,’ Fessey said.
It remains to be seen where any future pinch-points will arise. Delegation of portfolio management is a much-discussed topic. Fessey hopes that EU-based funds will be able to continue accessing that investment expertise as they do with US and Swiss managed funds.
The use of seconded staff from the UK to the EU might be another potential area of complication. ‘For example, to manage the marketing process for an investment firm, will it be possible to travel backwards and forwards across the channel for these activities? Would your portfolio manager be able to travel from London to meet an institutional client in the UK?’ he asked.
He noted that such concerns were moot at the moment, with Covid limiting travel and regulators being relatively sympathetic on the implications for substance. However longer term ‘I think there will a lot of small operational issues that may arise,’ Fessey said.