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EXECUTIVE SUMMARY
Background
Brexit poses unique challenges for financial sector policymakers in the EU as the most important financial centre in Europe is now outside its regulatory framework. The Trade and Cooperation Agreement (TCA) agreed in December 2020 between the United Kingdom (UK) and the European Union (EU) includes a very thin financial sector chapter, with eight out of 783 articles directly covering this sector. A Memorandum of Understanding to establish EU-UK structured regulatory cooperation on financial services has not been signed and any regulatory cooperation has been paused due to the conflict about the Northern Ireland Protocol, part of the UK Withdrawal Agreement.
Aim
This study summarises and discusses recent trends in financial sector legislation and regulation in the UK, divergence between the EU and the UK and threats from this divergence for financial stability in the EU. Critically, we assess the equivalence policy and strategy of the EU towards the UK and options to deepen regulatory cooperation while ensuring financial stability, market integrity and competitiveness.
Divergence of UK regulation from EU regulation is almost a given outcome following Brexit. The UK’s rationale behind the will to actively diverge from the EU pertains to broader political choices and regulatory approaches and objectives: flexibility, common law principles-based, competitiveness, growth, and innovation. In addition to such active divergence, there can also be passive divergence, with the UK not keeping up with EU legislative changes or not following new EU regulation in the financial services sector.
Key Findings
The UK approach to regulation will lead to the transfer of most rules from statutory level to the regulators’ rulebook, which will fundamentally reinforce the regulatory and supervisory model set by the Financial Services and Markets Act from 2000. The UK government introduced the Financial Services and Markets Bill that intends to amend, repeal or replace most of retained EU law and give regulators greater responsibility. This regulatory overhaul is led in parallel to the Retained EU Law (Revocation & Reform) Bill. In addition, secondary objectives would be added for regulators to ‘facilitate, subject to aligning with relevant international standards, the international competitiveness of the UK economy (including in particular the financial services sector) and its growth in the medium to long term’2. The secondary objectives of growth and international competitiveness would then differentiate the UK regulators’ mandate from its EU counterparts.
The UK has replicated a number of trade agreements between the EU and third countries; it has also concluded several new ones, while others are under negotiation. The Free Trade Agreements with Australia and New Zealand include non-discrimination rules to ensure the fair treatment of financial services provided in the other parties’ markets, and the free flow of financial data subject to privacy, personal data protection and public policy exceptions. Both of these as well as the Free Trade.
Agreement with Japan contain arrangements for regulatory dialogue, in the form of either a forum or a working group. The UK has also signed a Digital Trade Agreement with Singapore and concluded one with Ukraine, as well as a
Mutual Recognition Agreement concluded with Switzerland. The UK is also negotiating with several other countries and groups of countries in a strategy geared towards the Pacific region. Overall, Digital Trade Agreements might represent a network of ‘modern’ Free Trade Agreements. Moreover, the inclusion of Sustainable Finance Provisions in such trade deals constitute the first provision of its kind. However, some of them could be only ‘best endeavour’ commitments. These developments are part of the UK diplomatic and political strategy of strengthening its global presence, but developments in the digital/sustainable finance areas will have to be assessed in the medium term as regards their effective implementation. There are several areas where the UK has already taken initiatives that could result in regulatory divergence, in particular from the EU Single Rulebook in Banking and Financial Regulation. First, proposals for the implementation of the final Basel III reforms (also referred to as Basel 3.1) differ between the UK and the EU, with the latter deviating from the Basel III agreements with consideration for proportionality concerns. Both the UK and the EU are considering reforms of the Solvency II regulatory framework for insurers with the objective of fuelling more equity investment by insurers, but through different regulatory adjustments. The UK aims at reforming different aspects of its wholesale markets regime and capital market sector, though these reforms are considered low impact. The UK aims at becoming a global centre for FinTech and crypto assets, through a number of regulatory and supervisory initiatives, including a financial market infrastructure sandbox, a FinTech hub at the Bank of England and encouraging the development and use of stablecoins. The UK government has stated the objective to be the ‘world’s first net zero-aligned financial centre’, with multiple regulatory and supervisory initiatives. However, details, including a UK taxonomy, still have to be spelled out....
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