FCA chief executive Andrew Bailey has argued there is an “obvious basis” for the EU to grant the City equivalence as he notes Brexit is “a lot of work” for the regulator and did not feature in its business planning until a year ago.
In a speech to Thomson Reuters this morning, Bailey advocates for the “sensible use of equivalence”, which the EU uses for a growing number of non-member countries.
Equivalence provides an alternative to passporting allowed limited access rights to countries outside the EU where regulations are broadly similar to EU rules. However, unlike passporting it can be revoked at a week’s notice.
Without a passport fund managers would have to open a subsidiary operation in the EU27 or find an EU-based business partner to offer management services to Continental clients.
Bailey notes the UK would have to “provide comfort to our trading partners” that Brexit does not represent a race to the bottom on deregulation.
He argues the UK is incentivised to do so because its financial markets are an international public good and also points to the Senior Managers Regime as an example whereby the regulator is willing to above and beyond in recognition of the important of the financial services industry.
Bailey says: “A key area is investment services, shortly to be governed by the new framework under Mifid II and Mifir.
“Here a firm from outside the EEA will be able to provide cross-border services from outside the EU to professional clients and eligible counter parties within the EU without the need to establish in relevant EEA jurisdictions, provided that the regulatory regime of the other state is deemed to be equivalent and in some respects reciprocity exists.
“For retail clients, there is some scope to require establishment in some form (including branches), which is a sensible recognition of the wholesale-retail difference.”
Co-ordination with EU
Emphasising the importance of close regulatory and supervisory links with the EU, Bailey outlines four elements he envisages for post-Brexit co-ordination.
They are: comparability of rules, but not exact mirroring; supervisory co-ordination; exchange of information; and a mechanism to deal with differences. In addition, Bailey notes the importance of a transitional deal to “allow for a smooth path to the new post-Brexit world”.
“With the advent of much stronger international standards in the wake of the financial crisis, we are in a better place than ever before to create a strong platform of co-ordination,” Bailey says.
Single Market not essential
“I can’t deny that Brexit is a lot of work, and it did not feature in our business planning as a reality until a year or so ago, so a lot of sleeves have had to be rolled up,” Bailey told the audience at Thomson Reuters.
However, he says some Brexit talk is too pessimistic about trade restrictions, relocations and the future of open markets.
“Does Brexit have to mean abandoning the benefits of free trade and open markets in financial services? It should not. Does it require membership of the Single Market to get the benefits of free trade with the EU? No.”
Bailey adds that losing open markets is not a necessary response to the choice of Brexit.
Bailey said working with Government on repeal legislation was the regulator’s biggest current task.
The FCA will continue to work with Esma while the UK is a member of the EU, Bailey says.