Luxembourg Finance Minister Yuriko Backes is visiting London this week, at a time when advocates of maintaining strong UK-EU financial services relationships are struggling to have their voices heard. The Luxembourg government has sought to take the heat out of Brexit arguments since the 2016 leave vote, and this visit is the latest such effort.
“I think there’s a role for Irish and Luxembourg colleagues within the corridors of the European Union to act as a translator for what the UK really is up to,” said Michael Collins, Director of Government Affairs with the asset manager M&G, speaking to the Cross-Border Distribution conference hosted by Deloitte and Elvinger Hoss last month. As an ex-Head of the Economic and Financial Affairs in the UK Permanent Representation in Brussels between 2006 and 2010, he is well placed to understand thinking in Brussels and London.
No regulatory bonfire
Despite the sometimes aggressive rhetoric coming from parts of the UK government “there isn’t a bonfire of regulation. There isn’t a wholesale eradication of all of the protections that were put in place after 2008/9,” Collins said. “The better Luxembourg and Dublin understand what the UK is up to, the better they’ll be able to help to lower the temperature in Brussels,” he added.
Despite the headlines of a difficult UK-EU relationship, the constructive dialogue continues, he said. “The relationship at the macro level can be a little bit frosty, but there is still cooperation, with people at the working level still talking to each other,” he noted. For example, Collins pointed to sustainable finance being discussed frequently in the run-up to COP 26 in Glasgow, and that substantial coordination has been required regarding financial sector sanctions on Russia. Moreover, Backes is likely to have worked with some of the people she will meet this week given her previous roles as diplomatic advisor and Sherpa to Prime Ministers Jean-Claude Juncker and Xavier Bettel, and as the representative of the European Commission in Luxembourg.
Dialogue structures
But rather than basing a new relationship on ad hoc visits, Collins called for “an overarching framework for cooperation that brings together the most senior policymakers on a regular basis, including the Commissioner and finance ministers.” He accepted that regulatory divergence is “absolutely inevitable” but added that the impact of this can be minimised. “You have to decide whether that divergence matters, whether you’re going to act on that divergence, whether you’re going to punish that divergence.”
Building confidence is key. “The decision on whether to punish is heavily influenced by whether you trust the other side,” Collins said, and here Luxembourgish and Irish players can have an important role “giving the UK Treasury some tough messages” if they think that what London is doing will be badly construed. This would be on top to helping information to flow the other direction, putting London’s position into context in EU decision-making fora
Delegation can be preserved
Collins insists that there is reason to be confident that the fundamentals of delegation model can be preserved, even if he accepted the “legitimate concerns” that delegation increases operational and supervisory risk. “The good news is that all of those questions raised about delegation models have an answer. You can put in place memorandums of understanding with other supervisors to make sure you get access to data, you can look at the rulebook that a delegated entity is operating under,” he said.
The politics are challenging though. He noted that even when the UK was a member of the EU there was substantial “fairly straightforwardly protectionist” motivation for limiting delegation. Recently as well, particularly after the invasion of Ukraine, there are growing calls for the EU to onshore economic activity. “The geopolitical dimension makes the discussion a bit more complicated,” he said. “I try to be optimistic that policymakers are slowly realising that client interest is more than protecting them in case something goes wrong,” he added.