The CEO of the UK Financial Conduct Authority (FCA), Andrew Bailey, made some comments on Brexit at a Thomson Reuters Newsmaker event in London. According to his statement, the impact of Brexit on financial services has to be viewed in the context of an updated regulatory framework that is global in its design.
What the CEO of the FCA is referring to is the new regulations under MiFID II and MIFIR, which are coming into force at the beginning of 2018. According to some provisions in the regulatory framework, companies that are governed by regulators outside of the EEA (European Economic Area) are allowed to passport their services to institutional clients.
The framework is a result of the continued development of a harmonized regulatory framework in the aftermath of the Global Financial Crisis in 2008.
Bailey highlighted that firms do not need to relocate in order to continue to benefit from access to EU financial markets, while free trade can be achieved without membership in the single market.
“Existing and future regulatory cooperation should ensure sufficient alignment of standards and outcomes so that open markets can prevail,” the CEO of the FCA said.
According to Bailey: “Brexit should not be conflated with whether or not to have open global financial markets and trade in financial services. The economic and financial cost of losing open markets is too great to be justified and is not a necessary response to the choice of Brexit. And, to be clear, this is highly relevant to the FCA’s objectives. Amongst other benefits of open markets and free trade is the enabling of healthy competition, an important objective of the FCA.”
US and EU Clearing House Equivalence a Good Example
Recently the clearing house equivalence agreement between the US and the EU has served to prove how different regulatory environments can harmonize legislation. The FCA chief is outlining that while the agreement took time, cross-border regulatory co-operation is perfectly possible.
“This type of agreement can be backed up by effective joint supervisory oversight, something that is very clearly preferable to the cost and risk that is introduced by a location based policy,” Bailey explained.
“I quite often have it put to me that the UK is a different case from other non-EU countries because it has large and nearby financial markets, and therefore there needs to be a more restrictive outcome for the U.K. I don’t accept this proposition. Our markets have developed together on the basis of the same rules. It would be a departure from the sound regulatory approach of ‘same risk, same requirements’, and in a world of increasingly strong global standards of regulation, it is not the right approach,” he elaborated.
MiFID II and MIFIR Implementation
Andrew Bailey ended his remarks on a positive note regarding free market access for non-EU countries, highlighting that a cooperation framework already exists between the EEA and non-member states.
“There is already a basis for the sensible use of equivalence as the basis for market access between the EU and the UK in the future. It is the basis that the EU uses for a growing number of other countries. A key area is investment services, shortly to be governed by the new framework under MiFID II and MIFIR,” Bailey said.
“A firm from outside the European Economic Area (EEA) will be able to provide cross-border services from outside the EU to professional clients and eligible counterparties within the EU without the need to establish in relevant EEA jurisdictions, provided that the regulatory regime of the other state is deemed to be equivalent and in some respects reciprocity exists.”
This provision however is not touching on retail clients, where the requirement to establish some form of a subsidiary or branch is a sensible recognition of the wholesale-retail difference.