More than seven years on from the Brexit vote, the City remains in regulatory limbo, with some executives predicting more departures from London as a result of increasingly assertive watchdogs in the EU.
Financial services rules have been in a state of flux since the UK officially left the bloc. UK policymakers want to use new-found freedoms to cut red tape, while regulators keep one eye on investor protections.
Meanwhile, in Europe, watchdogs have tried to stop firms skirting access rules and strengthen their own rulebooks.
A new joint EU-UK financial regulatory forum is set to sit down for the first time on 19 October, with top officials from both sides at the same table, discussing a path forward – made possible after a June signing of a memorandum of understanding.
Financial Conduct Authority chief executive Nikhil Rathi told Financial News at the regulator’s annual public meeting on 4 October that the MOU was an “important development”, and the forum “will allow for a good exchange of information”.
But others are less optimistic that such gatherings will unlock some of the biggest roadblocks financial services has faced since the split, including the lack of an ‘equivalence’ framework which would have automatically allowed City firms to trade in the bloc.
There has also been frustration over how long it has taken to bring both sides together. Financial services were left out of the initial trade deal entirely. The MOU on regulatory cooperation – just four pages long – was ready in March 2021. It gathered dust for more than two years before it was signed in June this year.
“We begin at last more than two years later than might have been,” former chair of the European Affairs Committee, Lord Charles Hay of Kinnoull said.
Kinnoull said that while he hoped both sides would still look at equivalence, most firms had already “structured around this inconvenience, with some ongoing cost which is generally borne by customers ultimately.”
“A wider set of financial services arrangements would I am sure be of mutual benefit, but I don’t see appetite for this in the near term,” Kinnoull added.
Charlotte Crosswell, the inaugural chair of the government-backed Centre for Finance, Innovation and Technology and former head of international business development at the London Stock Exchange Group, told FN the fintech sector was “frustrated” when it couldn’t passport automatically.
“Do we want to move quicker? There is obviously frustration about simple conversations on both sides like the MOU; both sides would have benefited,” she said.
“A lot of people were pretty optimistic around equivalence decisions before Brexit,” a senior regulatory lawyer for a leading City firm says. “I thought that was quite optimistic, and that proved to be the case.”
The MOU is a “necessary first step but not sufficient” to solve the issues, they added.
A forum for the future
The FCA and Bank of England did not respond to requests for comment on the forum’s agenda. Despite its newly beefed-up role vetting the largest cross-border deals, the UK’s Competition and Markets Authority is not involved in the forum, according to a person familiar with the situation.
At the FCA’s public meeting, Rathi noted that the uncertainty around finance rules “is on both sides”.
“While we are adjusting our framework the EU also has an extremely heavy programme of regulatory reform,” he said.
The European Commission’s commissioner for financial services, financial stability and capital markets union Mairead McGuinness, one of FN’s 100 most influential women this year, has fronted up proposals on everything from bank crisis management and deposit insurance to retail investment, sustainable finance and financial literacy in the past year.
Those initiatives – as well as divergence on incoming Basel 3.1 bank capital rules between the UK and EU, and the fact international banks are still working through orders to beef up their EU desks by the European Central Bank – highlight how the pace of change is unlikely to slow down for City firms hoping for stability after overhauling their businesses in the wake of Brexit.
That could potentially lead to yet more resources being moved across to the bloc by London’s financial heavyweights.
“We are noticing that there’s a build-up of more people on the ground in Europe,” said Alex
Ainley, a partner in law firm Simmons and Simmons’ regulatory practice. “The transition process is still ongoing, but it’s at the point where that centre really is shifting towards Europe.”
One of the areas that might have the biggest impact is the European Commission’s continued attempts to drive more clearing back to the bloc.
A limited equivalence extension was offered at the time of Brexit, allowing EU firms to continue clearing trades in London. But this is set to expire in June 2025. European policymakers are mulling whether or not to force firms to have “active accounts” with European clearing houses and meet a minimum level of EU clearing.
“If the clearing battle is lost there will be roles that have to move, but that battle is still a long way from over,” said Ainley. “Very big names are saying don’t do this. Thy saying we need LCH in London, don’t disrupt that.”
And while EU has marched ahead with new green finance rules, in place since 2021, the FCA has pushed back introducing its own labelling regime multiple times.
Lord Adair Turner, the chair of the Financial Services Authority during the global financial crisis, who now chairs the Energy Transitions Commission, said that Brexit had not posed a real barrier to progress on ESG, however.
“The big thing we need is international standards above the UK and EU,” he said.
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