The UK and the European Union should strike a deal that offers both sides access to each other’s markets and goes beyond the option of regulatory equivalence, according to an advisory group set up by bank lobbying bodies.
The International Regulatory Strategy Group, sponsored by the City of London Corporation and TheCityUK, laid out a possible framework for the bespoke agreement between Britain and EU that the UK government has said it plans to negotiate. Along with criteria for access, the report proposes a joint committee that ensures regulations stay aligned and lays out ways to resolve disputes within a free trade agreement that covers financial services.
"What we're trying to do is set out a mechanism by which we feel we can have mutual recognition of our regulatory systems, which will enable cross-border business to continue to flow post-Brexit, " Mark Hoban, chairman of the IRSG, said in a telephone interview. "We want to try and shape thinking on both sides of the debate."
EU member states want to avoid granting a deal that gives the UK full advantages of membership in the region after it exits. British lawmakers have argued that EU companies also benefit from London being a financial capital. The report echoes that case, saying the UK is a “significant source” of funding for smaller EU corporations.
Financial services
As things stand, foreign firms are allowed to sell a limited suite of financial services in the single market if the European Commission, the bloc's executive arm, deems their home rules and oversight of specific business lines to be "equivalent" to the EU's. The status is granted by the commission and can be withdrawn at any time without appeal, making it more restrictive than so-called passporting, which is a right of membership of the bloc.
The report seeks a deal based on the understanding that the UK and EU will operate regulatory regimes that “have consistent regulatory objectives and aim to deliver comparable outcomes”.
While the UK will be excluded from the setting of EU regulation post-Brexit, global standards such as those developed by the Basel Committee on Banking Supervision, Financial Stability Board (FSB) and the International Organisation of Securities Commissions could form the basis for mutual access to the two markets, according to the report.
The focus on outcomes echoes Bank of England governor Mark Carney’s statement in a speech on April 7th, in which he said that “while regulations need not be exactly the same, they should deliver similar outcomes. This is now possible given progress at the FSB, where a series of agreed reforms are levelling the playing field and reducing opportunities for regulatory arbitrage.”
Framework divergence
While the UK will have the same regulatory structure as the EU on the day it leaves the bloc, the issue for the country is that, as time passes and new challenges appear, the two frameworks will diverge. That potentially will lead to disagreements about whether the outcomes of the two sets of rules remain similar enough for continued access, an issue that has to be settled using a dispute resolution mechanism.
Where disputes arise, the report suggests the two sides should again lean on global standard setters such as the FSB and International Organisation of Securities Commissions in resolving the difference. If there is a "material divergence", the agreement should allow for it to be dealt with and where that doesn't happen "there should be agreed processes governing the withdrawal of the arrangement", including giving affected firms time to adjust, according to the report. – (Bloomberg)
