24 April 2018

FCA's Bailey: Brexit: what does it mean for financial markets to be open?

It is useful to divide the subject into 2 parts: the prospects and reasons for a transition or implementation period; and what the steady-state future world could look like. I will follow that approach today.

There are 2 reasons in my view why we need a transition or implementation period. First, we need more time to mitigate these cliff edge risks – call that the transition reason. Second, it makes far more sense for firms and authorities to put into effect their plans only once they know what the steady agreement looks like – call that the implementation reason.

The cliff edge risks are symmetric in that they are present in both the UK and the EU. To reiterate, regulators and authorities in the UK and the EU share common objectives to preserve financial stability, and we have a common obligation to do everything we can and work together to do that. Financial stability is far too important to engage in a standoff.

I do recognise that the overall transition or implementation package is viewed as indivisible and that there remain issues to be agreed on it which are outside the area of financial services. But that does not stop authorities both here and in the EU working together to mitigate the cliff edge risks, even if we do not yet have a final agreement on what these arrangements will be.

The best thing we can all do now is to engage openly and speedily together to work on solving these issues and thus to preserve financial stability and protect consumers and users of financial markets. By doing this, we can create confidence that we will put into effect as smooth a transition as possible. We are ready to get to work on this. And, I would echo the words of Vice President Dombrovskis, namely that the ‘most important common objective in relation to Brexit must be to preserve financial stability’.

But for the moment we cannot assume that such arrangements will be in place and so the UK authorities have also set out plans for unilateral action in the UK to minimise cliff edge risks, providing continuity for firms doing business in the UK and confidence for their customers. The Government has committed to legislating for a temporary permissions regime. I welcome this, something that has been a priority for the FCA for some time as we believe that this provides certainty for firms which passport into the UK from the EU.

On day one of Brexit the UK and the EU will have deeply integrated financial markets with aligned regulatory rules. That is a benefit to both sides. Moreover, the benefits of open markets are worth preserving. And we can do it. We can together build an approach that supports mutual recognition of each other’s standards to support cross-border business. To reiterate the point I made on transition, this is the best way to maintain financial stability.

Unfortunately, I have heard the argument made that the best way to preserve financial stability would be to become less open, to limit cross border flows of business, to restrict domestic parties from having access to overseas markets, and thus to ensure that activity takes place in the home jurisdiction. Let me reiterate, to do this means restricting the activity of parties in the EU. I say this because I have no doubt that the City of London will remain open to business, so the question is whether EU parties will be allowed to do business here, not whether we will allow it.

In my view, closing access to financial markets which are global not regional will undermine not enhance financial stability. It will reduce the potential for financial markets to support growth and trade, impair innovation and limit the ability to manage risk, and thus make the overall financial system more fragile.

Moreover, closing off access to markets by not recognising on a robust basis other jurisdictions amounts to an own goal from the perspective of choice and competition.

I am encouraged that there are now fewer comments to the effect that financial services cannot feature in the steady-state agreement between the UK and the EU. They can and they should because the benefits of open markets will be realised by both sides. And, it is the best way to ensure financial stability, the integrity of markets, the protection of consumers, and competition and choice. These are the key public interest objectives for all of us, here and in the EU27. Meanwhile, we have to work together now to mitigate the immediate cliff edge risks. I’ll say again, now is the time for the UK and EU authorities to come together and work on the solutions to reduce the risks to financial stability that Brexit could pose.

Full speech

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