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UK’s post-Brexit financial rules add pressure on EU over market access

The UK government published plans on Tuesday for post-Brexit financial regulation that it claims will maintain the “highest” standards — challenging the EU to decide if it is sufficient to allow British groups continued access to its markets.

Papers released by the Treasury set out how it intends to regulate banks, asset managers, and derivative traders when the Brexit transition period ends on December 31, and EU directives no longer apply.

But while it stressed that the new UK rules reflected existing EU and international standards, such as the Basel Accord on bank capital requirements, City minister John Glen said “there will be changes” and the Financial Conduct Authority outlined a more “bespoke” approach to regulating investment groups.

As a result, the EU must assess whether the UK’s domestic legislation will deliver equivalent outcomes to its own directives — and whether this “outcomes-based” equivalence is sufficient to permit Britain’s financial services sector continued access to the bloc’s financial markets. 

Agreeing a deal on “financial equivalence” is vital to the UK economy. Financial services exports to the EU were worth £26.1bn in 2018, or a fifth of total services exports. By comparison about £6.1bn was recorded in financial services imports from the EU to the UK.

The Treasury indicated its draft rules ought to give Brussels enough information to inform a decision, noting that they commit to “the same high standards of regulation in the context of ongoing equivalence discussions with the EU”. 

However, analysts and lawyers said the UK’s plans showed it would consider taking a different approach in some industries — which would test the EU’s willingness to accept divergence from its own rule book. 

In the case of fund management, the FCA said the proposed UK rules would focus more on the potential for harm to clients than on the risk to groups, and would ultimately reduce regulatory costs. 

“This is an important development, insofar as the FCA has stated that it will tailor the rules for the UK market but expects the result to be in line with the EU rules,” observed Sean Tuffy, head of market and regulatory intelligence, at Citi. “This is going to be a test of the UK’s preferred ‘outcome based’ approach around regulatory equivalence.”

Michael McKee, a partner at law firm DLA Piper, said it was also likely the UK would seek flexibility over bank regulations. “What this reiterates is that the UK will focus on abiding by international standards such as the Basel Accord going forward — but will increasingly be willing to diverge from the EU where it considers this to be appropriate.” 

Under the original timetable for UK-EU trade negotiations, the two sides had intended to carry out tests of regulatory equivalence by the end of this month, and seek an agreement in the second half of the year. Recent progress reports suggest the June deadline may not be achieved. However, a person familiar with the UK’s position said an equivalence deal was still the intention, and the publication of the proposed UK regulations did not change this.

“These are practical reforms to prepare firms for [a] future outside [the] EU,” the person said. “They are sensible small adjustments, not a big bang. This is not a bonfire of the regulations — the UK will still maintain high regulatory standards so this does not preclude an equivalence deal.”

Among other measures announced by the Treasury were new powers for the FCA to manage the transition away from the tainted Libor lending benchmark by the end of next year. “If nothing else, it’s an important sign that lawmakers still expect the sector to be working to a 2021 deadline,” said Claude Brown, a partner at law firm Reed Smith.

Meanwhile, UK port executives told MPs on Tuesday that a new computer system to manage EU-UK border freight was still at the “specification phase” and had yet to undergo full testing with less than six months to go until the end of the Brexit transition period.

Tim Reardon, the head of EU exit for the Port of Dover, said the new Goods Vehicle Movement Service was still at the “specification” phase to ensure that the system had a “fighting chance of doing what it is needed to do” to enable UK exporters to pre-declare goods before reaching the border.

Alex Veitch, the head of international policy at the Freight Transport Association, said the system would be “critical” to smooth border operations, but hauliers had only been notified of the details “in the last week or two”.

HM Revenue & Customs said it planned to build a new IT system to facilitate movement at the border to support locations with limited space or infrastructure. “We will continue to develop our systems in readiness for the end of the transition period and when full border controls are implemented from July 2021, and we are engaging with industry as plans develop.”

This article was first published at https://www.ft.com/content/948c01e7-970e-46b4-8d51-0428ca7f5cda

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The Markets Today