Treasury moves to ‘take back control’ of UK financial rulebook as Brexit talks near collapse

The UK Treasury is in talks with some of the world’s largest firms about how best to “take back control” of UK financial services regulation after Brexit, Financial News can reveal.

The preliminary industry-wide talks, which have been held over the phone or via video-conferencing platforms with Treasury officials in recent weeks, come ahead of an official consultation into the post-Brexit future of UK financial services regulation. This is set to be launched by the department within weeks, according to people familiar with the matter.

“Now we’ve left the EU, we can take back control of our financial services regulation and ensure it works for the UK,” a Treasury spokesperson told FN.

“It is right that Treasury ministers and officials engage closely with the sector as we assess how to regulate better whilst also maintaining our world-leading regulatory standards and supervision.”

The Treasury will seek to uphold the UK’s status as a global financial centre and does not intend to “have a bonfire of financial services regulation”, the spokesperson added. 

It comes as the UK Prime Minister Boris Johnson warned on 16 October that a crash-out Brexit was likely. That presents some within the financial services sector with an opportunity to push for its rules to deviate from European standards. The UK’s transition period for leaving the EU will end on 31 December, regardless of whether or not a deal has been agreed. 

Among the list of EU rules that some City executives want UK policymakers to consider scrapping are those that require fund managers to pay brokers separately for research and trade execution, according to lawyers and an asset management executive with knowledge of the discussions. These rules came into effect in the UK in 2018 as part of the bloc’s revised Markets in Financial Instruments Directive.

The Treasury did not comment on the rules that came up in discussions with finance firms.

“We’ve had chats [with the Treasury],” said a senior bank lobbyist involved in the talks.

“It seems to me, more likely that divergence [is] the name of the game. But then divergence to what?… [It’s] a huge long process of going through all the rulebook and actually working out what you want, where you want it, how you want it to be done.”

Representatives from some of London’s largest banks and asset managers including Citigroup, and BlackRock have spoken with Treasury officials about the future of UK financial services regulation after Brexit in recent weeks. These have been part of industry-wide discussions on other matters, according to people with knowledge of them.

Executives from BlackRock favoured consistency or continuity of rule-making , according to a person familiar with their thinking.

Banks and insurance firms have also been urging UK policymakers to rethink aspects of wide-ranging regulation dictating how much capital their companies must hold against certain assets or insurance policies, according to people with knowledge of the discussions.

“[Treasury] wants to have quiet discussions. They have been very low-key,” said Jonathan Herbst, a partner at law firm Norton Rose Fulbright, who is familiar with the talks. “Treasury officials are clearly interested in talking to people. They are in listening mode.”

Rob Moulton, a partner at law firm Latham & Watkins which advises finance firms, said there was now an “unannounced but clear government policy” that the UK might change its financial rulebook once it splits from the EU in December.  

“[UK policymakers] are saying, now is a good time to come forward to tell us stupid EU rules that you hate, because we may if we agree with you [make some changes],” Moulton said. “Every sector has got half a dozen points [they hate]… that people are chipping away at.”

The Treasury department announced in June that it planned to review Solvency II, prudential requirements that stipulate how much capital insurers and reinsurers should hold against policies, from autumn 2020. 

Steven Findlay, the head of prudential regulation at the Association of British Insurers, the insurance sector’s lobby group, said that the ABI was “engaging quite closely with Treasury” in a bid to “make the regime work better for the UK”.  

“We don’t see the need to abandon [Solvency II] altogether or tear it up and start again,” he said. “We see the review as an opportunity to make it more appropriate for the UK industry.”

City firms had previously hoped to secure a Brexit deal for financial services based on an improved version of the EU’s existing framework to non-members, where its regulators declare financial rules equivalent on a piecemeal basis. 

But in June, the UK’s Chancellor of the Exchequer Rishi Sunak indicated the UK would consider diverging its rules from European standards “where it is appropriate for the UK… to take an approach that better suits our market”. Meanwhile, days later, the EU’s chief negotiator, Michel Barnier made it clear that the EU would not be granting equivalence decisions readily anyway.

One senior lobbyist in the asset management sector, with knowledge of the City’s discussions with Treasury, said the “mood music has changed” around the scope for changing the UK rulebook since the summer, with the mood within Treasury appearing to “harden” towards potentially diverging the UK rulebook in the coming months.

That could have broader ramifications for the way the UK’s finance sector operates in future. 

 “The moment the UK Government says we’re not going to implement this bit or that bit of future European rules, every European rule is up for grabs,” Moulton said. “It opens the floodgates.”

To contact the author of this story with feedback or news, email Lucy McNulty

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