10 April 2017

Financial Times: City of London explores ways to access EU market after Brexit

[...] Lawyers are combing through existing agreements that could allow UK-based firms to strike trading deals on a firm-by-firm basis or even for individual lines of business.

Jonathan Herbst, the global head of financial services at the law firm Norton Rose Fulbright, said companies could volunteer to be subject to EU rules in order to gain market access. “Think of it a bit like a manufacturer from a third country who wants to sell goods in EU markets,” said Mr Herbst. “If you want in, then you have to sign up voluntarily to meet all the packaging, labelling and product safety standards.”

So-called voluntarism already exists on a piecemeal basis in financial markets. Britain, for instance, has what is known as the “Overseas Persons Exclusion” which allows individual foreign firms to gain unregulated access to UK markets so long as they are not physically present in the country, abide by certain rules and deal only with institutional clients.

There are also wider sectoral arrangements sanctified at a regulatory level, such as the US Foreign Boards of Trade rules through which the derivatives regulator, the CFTC, permits foreign exchanges to do business with American investors.

To opt in, participating exchanges must consent to US legal jurisdiction for their American activities. They must also be certified to be in good standing by their home country regulators.

After Brexit, UK-based firms could strike access deals directly with EU countries, which would be cemented by agreements between regulators over standards. Mr Herbst said a key advantage was that this would bypass the need for a political deal, or new primary legislation.

[...]Many of the building blocks are already in place that would make it possible for UK based firms to bind themselves to follow EU standards even if no industry or sector-wide deal was in place, Mr Herbst argued.

Regulators already collaborate extensively across borders, from simple agreements that recognise each other’s standards in specific areas to formal “colleges”, where they share certain supervisory powers.

Some EU countries, such as Ireland, have legislation that gives non-EU firms the ability to deal with local customers similar to the UK’s Overseas Person Exemption. Germany’s Bundestag is presently considering a regime that would give bank traders access to its markets. Voluntarism is seen by some as potentially a more flexible alternative to “equivalence” as a way to mimic the access conferred by EU passports. [...]

Voluntarism may not deliver the same uniform type of access, not least because many deals might be struck on a country-by-country basis with member state regulators. But it also has advantages. One is that it may require less political heavy lifting than a formal EU-wide equivalence declaration, thus making it easier to deliver swiftly in practice. Another is that it could be less vulnerable to sudden revocation. EU law specifies than equivalence can be withdrawn at 30 days’ notice.

Mr Herbst points out that it would also get round the UK’s concern about regulatory sovereignty because it would not require the whole rule book to be deemed “equivalent” to that of Brussels after Brexit. “So you can have your own rules designed for domestic markets and those who want to trade primarily with the rest of the world,” he said.

But there are questions about how widely applicable voluntarism might be as a solution. One issue is enforcement. “Voluntarism is an interesting idea and worth exploring,” says Barney Reynolds, head of financial institutions at Shearman & Sterling. “But the idea of signing a contract to submit to EU jurisdiction does raise questions about how EU rules would actually be enforced if there were a breach.”

Mr Herbst conceded that much depends on regulators being willing to be part of a “coalition of the willing”. The system only works if a watchdog in one country is prepared to oblige the firms it regulates to obey another watchdog’s rules.

Nicolas Véron of the Bruegel Institute sees the potential for clashes between EU regulators and national authorities. “You could have different national authorities taking different stances on access which could cause a big fuss with the European Securities and Markets Authority,” he said. “Similar issues arise when it comes to the power of recognition — is the signing of deals with the UK a matter for national authorities or is it something that should happen at the EU level?” he said. [...]

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