Signs of how the EU will seek to remould its relationship with the UK on financial services are starting to emerge, Yet it’s unclear to what extent this will be a technocratic, economics centred approach or a more political vision. The industry also wants clarity on how regulation-setting will change post Brexit.
Of particular concern to the financial sector is how existing rules will be interpreted. For example, it remains to be seen whether the Commission will enable EU-based funds to delegate portfolio management to UK players. Ugo Bassi (pictured) the director of DG Financial Markets at the European Commission was interviewed for the online version of the normally Luxembourg-hosted Cross-Border Distribution Conference 9th February. Asked whether he expects his administration will grant this equivalence ‘passport’, or whether this will be down to individual member states, he said ‘I don’t know.’ A clear but somewhat pregnant answer.
He cannot say if he does know, not least because politics will almost certainly inject itself into these considerations. In theory, EU and UK regulators would sit down and coolly agree mutually beneficial rules. Yet there is the temptation to tweak the rules to disadvantage UK-based players. The clock is ticking on the planned agreement by 31 March 2021 of a memorandum of understanding establishing a framework for financial services regulatory cooperation.
Tetchy relationship
Yet early signs of the temper of EU-UK relations suggest this transition could be marked by an atmosphere plagued by mutual distrust. As well as the public spat over vaccine supplies, and London’s on-going refusal to grant the EU ambassador full diplomatic status (unlike 142 other countries), developments also point to a lack of mutual comprehension. The mood will be affected by on-going stories of business leaking to the mainland, such as the confirmation of Amsterdam becoming Europe’s largest share trading venue last month.
London has as yet failed to appoint a representative to the EU–UK Partnership Council. This is the body established by the Trade and Cooperation Agreement (TCA) Brexit treaty to oversee the work of nearly 20 committees and working groups on the future relationship between the two unions. One of these is the Trade Specialised Committee on Services, Investment and Digital Trade which will deal with financial services.
The latest Brexit cliff edge
Perhaps even more seriously, is how on the current trajectory the EU will not have time to ratify the TCA, which would result in a no-deal exit. The current deadline is 28th February, but the European Parliament is still studying the deal and will not vote on ratification this month. The EU–UK Partnership Council can request an extension, but this requires the UK to appoint a representative to ask for the latest cliff edge to be averted.
This latest potential pitfall is the result of a London political elite ‘that never took the European Parliament seriously and is not therefore psychologically prepared for scenarios where the whims of the European Parliament can decide the UK’s fate,’ said Alexander Clarkson, a lecturer in German and European Studies at King’s College London. In other words there is the potential for carefully crafted deals between regulators and governments to be blown off course by MEPs who feel they are not being shown sufficient respect. That banks and investment funds might be adversely affected might not necessarily moderate European parliamentarians’ views.
Finance as political football
Even if an MOU is signed and equivalence granted, each can be rethought relatively quickly by the EU. For example, the union might decide that granting Wall Street favours might enhance the EU-US relationship, meaning that UK-based players get caught in the crossfire. An example of how this might look was the Commission’s decision on 27th January to allow US clearing houses to serve EU customers. This is a business traditionally being dominated by The City. Similarly, when Switzerland voted in a 2014 referendum to restrict EU immigration, the threat to end Swiss access to EU financial markets saw this proposal watered down.
We are not there yet and the Commission wants the UK-EU relationship to work. ‘We are studying how to put in place a regulatory cooperation dialogue,’ Bassi noted. ‘Certainly it is in our interest, as it is in the interest of our UK friends to put in place a scheme which would allow us to exchange, to engage, to discuss and to try to make sure that we converge as much as possible. Or at least that we try to avoid diverging,’ he added. It remains to see if this technocratic vision will win out over the political outlook.
Wider impact on regulation
The other unknown impact of Brexit is how it might affect the way financial regulations are written for the EU internal market. It is a cliché (with a large grain of truth) that the UK used to set the agenda on EU financial sector regulation. Bassi’s comments suggested a measured approach is planned for now.
On the review of AIFMD and UCITS, ‘there is no revolution expected,’ he said. UCITS and AIFMD are ‘very successful’ and ‘universally recognised internationally as very efficient brands,’ he added. ‘If we consider that something is needed, this will be in the area of small tweaks here and there.’
Bassi also gave a frank assessment of the PRIIPS project, and the key investor information document (KIID). ‘We thought initially that this was not only clear in terms of objective, but would also be really easy to put in place, making sure that retail investors have the right type of information,’ he said. ‘However, it turned out to be pretty challenging, probably because of the very wide scope.’ He said further work is needed. ‘The objective remains in my view laudable, but we have to work on it together in order to make it work. But we’re not there yet, we will get there.’