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UK-EU unequalled

UK Chancellor Rishi Sunak’s Mansion House speech yesterday delivered the final coup de grace headshot to any lingering hopes for EU-UK equivalence.

“The UK has an abiding interest in a prosperous and productive Europe. We have deep shared values and a long history of cooperation. And we will strengthen those ties. At the same time, as I said in Parliament in November, our ambition had been to reach a comprehensive set of mutual decisions on financial services equivalence. That has not happened. Now, we are moving forward, continuing to cooperate on questions of global finance, but each as a sovereign jurisdiction with our own priorities. We now have the freedom to do things differently and better, and we intend to use it fully.”

Rishi Sunak

The speech goes on to laud the existing UK-US trade relationship, and to promote the untapped potential of China’s £40 trillion total assets, accompanied by the typical paean to UK innovation and technology leadership.

The speech was accompanied by an HMT wish(to-do)list “A New Chapter for Financial Services”, endorsed by the Chancellor, the BoE’s Andrew Bailey and FCA Chief Executive Nikki Rathi. The document foresees an: open, eco-friendly, dynamic and globally competitive financial services sector, creating jobs, supporting citizens and communities, powering growth etc. The UK will reach this other side of the rainbow via four main routes:

  • An open and global financial hub. The UK will enhance existing  and establish new relationships with emerging financial centres- China, India, Brazil
  • The UK will lead in technology and innovation. Somewhat counter-intuitively, this includes the proposed HMT consultation on  protecting access to cash
  • The UK will lead the world in Green Finance. Environmental and climate impacts, as well as risks and opportunities, will be reported via integrated sustainability disclosure requirements (SDR). The SDR roadmap will be published before the COP26 climate change conference in November 2021.
  • Create a competitive marketplace promoting effective use of capital. The UK government will:
    • Deliver changes to the financial services regulatory framework to reflect the UK’s position outside the EU through the Future Regulatory Framework Review
    • Reform the prudential regulatory regime for insurance firms
    • Champion efficient and competitive markets by reviewing the UK’s wholesale capital markets regime
    • Ensure the UK’s prospectus regime is fit for purpose by consulting on reforms to the regime
    • Enhance the attractiveness of the UK for asset management through reviewing the funds regime

While the first three items- hub, tech and green- are perhaps more wish list than to-do, the fourth competitive market goal is more substantially fleshed out. The speech and dreamcatcher document were jointly published with an HMT consultation paper on the Wholesale Markets Review (“the WM review”) and a response to call for evidence on the UK Solvency II regime review.

The WM review is effectively the “Brexit happened- what now?” roadmap. It outlines initial proposed reforms to the UK capital markets regime, based on the overarching principle and objectives of: upholding high regulatory standards, promoting openness and competitiveness, delivering fair and proportionate regulation and supporting economic growth. If the trend to UK-EU divergence needed any confirmation, the review provides ample. Alongside higher-level questions regarding Regulatory priorities, concrete proposals to date recommends restructuring or removing some key elements of the MIFid II legislative behemoth:

  • Clarifying the regulatory perimeter and conditions governing trading venues and SI’s
  • Removing impediments to trade execution such as the share trading obligation and double volume cap
  • Recalibrating the transparency regime for fixed income and derivatives markets
  • Fundamentally reviewing the commodities position limits regime
  • Amending the market data regime to enable participants to identify the best available prices

The consultation closes to responses on 24 September 2021. Responses will be considered in conjunction with the Financial Services Future Regulatory Framework (FRF) Review.

The argument that the UK has swapped 20% GBP for the 0.01 GDP generated by the fishing industry is well-rehearsed elsewhere and positions are so entrenched as to make meaningful debate problematic. It is now abundantly clear that broad EU equivalence will not be sought or granted in the short to medium term. Although, firms have already made extensive transition preparations, to the extent that these relied on a near-term grant of equivalence, they should be torn up, or at least revisited. The more interesting question is the future extent of divergence. There are a number of MiFID II elements which either aren’t working as intended (RTS 28), or won’t work without data from the UK (liquidity calculations). It makes good sense to reformulate and adjust in these circumstances, as the EU is itself doing. However, the combined effect of political rhetoric and quite immediate alteration to a landmark piece of EU legislation points to overall deregulation.

The UK will, no doubt, “uphold the highest Regulatory standards”, and unshackled from the EU central ossuary, the City will benefit from more “proportionate” Regulation; although obvious questions remain as to simple issues such as time-zones in respect to opposite sides of the globe. No-one should read the above as a signal that the UK is about to turn into a not-great weather global tax haven; even if desirable- the weight of Regulatory consensus and the commercial need to continue high standards disallow the notion. However, yesterday’s speech and its accompanying documents do represent an, at least implicit and unilateral, recognition of a fork in the Regulatory road.

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