Budget commitment to implement Basel standards and updated investment firms prudential regime

The Chancellor of the Exchequer delivered the 2020 Budget to Parliament on 11 March 2020. This includes a package of related policy documents, many of which highlight planned reforms to the financial services sector.

Of particular note for banks and investment firms is the policy statement on prudential standards published by HM Treasury, which confirms the government’s intention to implement:

  • CRD V and the related Basel III banking standards through powers in the forthcoming Financial Services Bill, including the more recent “Basel 3.1” reforms not incorporated within the EU CRR II regulation; and
  • an updated prudential regime for investment firms in the UK. The policy statement notes the instrumental role played by the UK Government in developing the EU prudential regime for investment firms (ie the Investment Firms Directive and Regulation), although there is no specific commitment to closely mirror the EU regime, or indeed the CRR II rules.

The possibility of divergence in approach is also hinted at in the closing comments, which note that HM Treasury is conducting a review to determine how the regulatory framework will need to adapt to the UK’s position outside of the EU, including examining the ongoing allocation of regulatory responsibilities between Parliament, HM Treasury and the regulators. Both the Government and the regulators will consult on proposals to implement the various prudential reforms “in due course”.

Clive Cunningham

Clive Cunningham
Partner, London
+44 20 7466 2278

Katherine Dillon

Katherine Dillon
Of Counsel, London
+44 20 7466 2522

UK and EU set out their stalls on equivalence and the future trade deal (or no deal…?)

On 26 February 2020, the UK Government published its approach to UK’s future relationship with the EU.

The sections on financial services in the UK’s approach document are set out below:

Chapter 16: Financial Services

  1. The Agreement should promote financial stability, market integrity, and investor and consumer protection for financial services, providing a predictable, transparent, and business-friendly environment for cross-border financial services business.
  1. The Agreement should include legally binding obligations on market access and fair competition, in line with recent CETA precedent.
  1. The Agreement should also build on recent precedent, such as the EU-Japan EPA and international best practice, by establishing regulatory cooperation arrangements that maintain trust and understanding between our autonomous systems of regulation as they evolve. This could include appropriate consultation and structured processes for the withdrawal of equivalence findings, to facilitate the enduring confidence which underpins trade in financial services.

Equivalence in Financial Services

  1. The UK and the EU have committed to carrying out unilateral equivalence assessments for financial services, distinct from the CFTA. The fact that the UK leaves the EU with the same rules provides a strong basis for concluding comprehensive equivalence assessments before the end of June 2020.

Unsurprisingly, these are brief and outcomes-focused in nature, reflecting the Government’s approach more generally and the desire for “autonomous systems of regulation” (as preserved under the EU-Japan Economic Partnership Agreement)  rather than close alignment. The comments on equivalence do serve as a reminder to the EU that the UK will nonetheless be starting from a position of close alignment, but as ever, there are no guarantees that this challenging deadline for completing assessments will be achieved.

On the same date, the European Commission has also published a speech delivered by Michel Barnier, the EU’s chief negotiator on its future relationship with the UK, addressing the potential for UK/EU co-operation post-Brexit. The tone of the speech is characteristically challenging of the UK’s perceived desire to preserve sovereignty and regulatory autonomy while maintaining access to EU markets. Mr. Barnier’s discussion of equivalence indicates the lack of appetite from the EU to develop a more extensive and durable form of equivalence for cross-border market access, as explained in the following extract:

[Equivalence in financial services]

“… The EU will have the possibility to grant equivalences. We will do so when it is in the interest of the EU; our financial stability; our investors and our consumers. But these equivalences will never be global nor permanent. Nor will they be subject to joint management with the UK. They are, and will remain, unilateral decisions.

I read in the Financial Times recently that London must retain its primacy as a hub for wholesale financial markets without becoming a rule-taker of European regulation. As a former Commissioner in charge of financial services, allow me to question that. Why should we accept that the profits stay in London while the EU carries the risks?

The UK may not want to be a rule-taker. But we do not want to be the risk-taker. When the next financial crisis strikes, who will foot the bill? I doubt the UK will foot it for the EU. That is why the EU must take the responsibility for its financial regulation, supervision and stability.”

Clive Cunningham

Clive Cunningham
Partner, London
+44 20 7466 2278

Katherine Dillon

Katherine Dillon
Of Counsel, London
+44 20 7466 2522

Patricia Horton

Patricia Horton
Professional Support Lawyer, London
+44 20 7466 2789