In early March, I wrote about some of the challenges faced in relations between the UK and EU on the topic of financial services regulation post-Brexit. I noted that expectations, desires and reality were not always aligned between the parties on what could or should be achieved.
How closely aligned these two important jurisdictions remain on key points will shape how financial services and interactions between the markets in the EU and London evolve over time. This is particularly true as we progress through major reviews of the underpinning legislation for banks, insurers and other key elements in the EU and UK right now.
So, with news that a Memorandum of Understanding (MoU) on Regulatory Cooperation has been struck between the two, do we have a clearer view of how the parties will work together? More importantly, can we say anything more today about how relations will progress and how closely aligned markets in each will remain?
First of all, it’s important to note that under almost all scenarios in the future, the UK and the EU will remain important trading partners. This is true in both financial services as it is in other elements of trade. However, the cost and ease of doing such business will certainly dictate how much of that trade there will be.
London continues to be the most important financial centre in this part of the world, although its star has somewhat waned post-Brexit. Currency trading (Paris) and clearing (Amsterdam) are the most obvious examples of shifts in business, but several other locations have also benefited from relocations of staff, operations and capital to the EU. And with talk of economic autonomy becoming much more normalised within the EU, this move seems to be a permanent feature of EU markets today and in the future. That said, the agglomeration effect of bringing together skilled finance personnel, legal institutions and decision-makers on global capital is still largely present in London.
The main objectives of the EU and UK in coming to an agreement on regulatory cooperation in financial services are clear. Firstly, for both sides, asserting their autonomous control over the decisions they make about their markets. Secondly, maintaining an open dialogue on matters relating to cross-border trade to avoid arbitrage between the jurisdictions. And thirdly, to ensure that business can continue to flow between the two in the interest of both.
If we look at the MoU, can we say that these objectives have been met? Well. Sort of. Overall, the text shows a lot of good intention, but little in the way of substance. The MoU is very careful to avoid any suggestion that either side will have a say in the decisions of the other party. This is of course understandable and expected, but what remains is a text which imposes no obligations on either party when it comes to sharing information or in joint decision making. Again, this is understandable, but is far short of what many had hoped for. In particular, the MoU does little to provide a mechanism to avoid divergence – that will be left to the substance of discussions and the sovereign decisions of both parties to actively remain aligned.
On a positive note, it does set out that the UK and EU will share details on implementation of international standards and on their respective positions on future developments. This could be a valuable way to ensure that the EU and UK have some alignment on how global rules develop. Given that both will have similar outlooks on these issues, this should reduce the risk of major divergences.
What is clear is that rather than being constrained by bilateral agreements, the EU and UK will need to actively and consciously choose to maintain close relations and avoid divergence. And this will be driven, more than anything, by the will of those in power in London, Brussels and the member state capitals. This means that there will not always be great clarity about how things may develop in the future for market participants. The pressure on structures and models that many in our industry have felt post-Brexit will likely continue regardless of this MoU. And rather than relying on external mechanisms, insurers, brokers and others in the sector will need to closely manage their regulatory relations to ensure they stay on the right side of expectations.