Brexit and financial services: where have we got to?

Speaker: Andrew Bailey[1], Chief Executive
Event: City Banquet, Mansion House, London
Delivered: 25 October 2018
Note: this is the speech as drafted and may differ from the delivered version

Highlights

• The FCA is on course to be ready for a hard exit from the EU and has the resources to handle it.
• It is important for both sides that we coordinate to avoid disruption in the event of a no deal situation.
• We want the permanent arrangement post Brexit to allow for close alignment with the EU, without the UK being a rule taker.

Lord Mayor, it is a pleasure to be at the City Banquet again. I feel that for the first time, I must start with a formal statement on the status of this evening’s event. For the many of you who will be concerned about this, it does not count as entertainment for the purposes of MiFID II. I have applied a simple test to reach this conclusion, tonight is an enjoyable event and no one in their right mind should be doing MiFID II business here this evening. And, what about the future post-Brexit with equivalence? Lord Mayor, you and the Corporation are sui generis, so it’s ok.

While I am on the subject of MiFID II[2], I have had a couple of complaints – actually, there are others. The first is that MiFID II is leading to a critical decline in the quality of sandwiches served at City events. It’s hazardous for the FCA to give guidance, but here goes. If you are offered a sandwich and are assured that it has no value for MiFID II purposes, I would probably not eat it. The second complaint is that MiFID II is leading to a troubling rise in golf handicaps. All I can say to that – taking a European view – is: 'Tiger, you should be worried about the even bigger beating you would have taken but for MiFID II'. And, just for the record, I didn’t make those two complaints up.

Planning for Brexit

All of that brings me quite neatly to Brexit. Let me start with the implementation and transitional issues. We are preparing[3] for a range of outcomes including an implementation period that smooths transition and a hard and sudden exit. It’s a lot of work, but I think we are on course, thanks in very large part to the huge input from FCA colleagues. I was amused the other day when someone asked in Parliament if the FCA had adequate resources to deal with this. It was the same day that we put out 900 pages of consultation documents on Brexit preparations for no deal, which is good going in a single day even by our standards.

So I think we can handle it. But, as I have said before, we urgently need the engagement of our EU counterparts so that we can put in place Memorandums of Understanding (MoUs) and other important practical arrangements. This is not just a self-serving UK point; it applies to both sides. MoUs will support cross border supervision of firms and data sharing will support our ability to jointly oversee markets. The FCA is a significant sharer of cross border data. We pass on around 70% of the transaction reports we receive to our counterparts across the EU, and we are committed to continue this if it is possible. We will also need close coordination on MiFID transparency thresholds if the EU version of MiFID is no longer based on UK data.

This technical, regulator-to-regulator coordination is essential to minimise disruption in a no-deal situation. Of course, there is a broader solution to removing cliff edges which is for both the UK and EU to commit to taking reciprocal equivalence decisions on each other’s regimes, as early as possible. Our work to onshore the EU rulebook, as outlined in our consultation, demonstrates that on day one, the UK will have the most equivalent framework to the EU of any country in the world.

At the FCA, we are ready to go forward on this work, and I am encouraged by the recent commitment from Steven Maijoor, the Chairman of ESMA[4], to start work on MoUs, and that there should be put in place arrangements to avoid disruption to clearing.

More generally, I would like to thank Steven and our counterparts in national authorities in the EU for continuing the very constructive engagement. That’s the spirit to which we at the FCA are committed and we will do all we can to support continued cooperation. From time to time I read recommendations that post-Brexit UK regulators must engage internationally and punch our weight. I can assure you, we already do.

At the same time, at the FCA we have also been making clear that our objective towards consumers and the conduct of firms and markets towards them is critical to us. What does this mean in the context of Brexit planning? First, that the FCA has been a very strong advocate, from very early on, of developing the Temporary Permissions approach[5] to underpin the continuity of service by firms that have up to now serviced consumers in the UK under an inward to the UK passport. I am pleased that these arrangements are now on their way through Parliament, in the form of the Statutory Instrument.

But, as the FCA consumer objective goes beyond consumers in the UK, it is relevant to consumers elsewhere served by UK firms whatever their nationality. We cannot of course make rules that override those in the EU or require legislation elsewhere that achieves a particular end. But there are things we can do, and we are doing. Let me give two examples. First, we have given our public support to the statement by Lloyd’s of London that in the event of the UK leaving the EU with no transition or implementation period, Lloyd’s underwriters will continue to honour their contractual commitments including the payment of valid claims. This goes to the heart of treating customers fairly. To say the alternative, that valid claims will not be met, would not be consistent with our objectives as the UK conduct regulator and it would violate the tradition of the City of London. To be clear, this is not to deny there are cliff-edge risks to a sudden and hard Brexit transition. There are. But the time to analyse them is over. We have to deal with them and solve the problems we face.

My second example is that we have made it clear to the large international banks operating here that for non-EU clients they should only consider moving activity away from the UK if it is demonstrably in the interests of the client to do so. This is not a matter of being wilfully disruptive; it’s what our objectives mean. It’s about treating customers fairly. Brexit does not override these objectives given to the FCA in statute by the UK Parliament.

The post-transition future

I want to move on to the post-transition future – the permanent arrangement. To be clear, it is not for the FCA to decide this. We are providing technical assistance to the Government, and we will also as requested provide our technical analysis to the Treasury Select Committee to support their important role of assessment. What follows should therefore be viewed in this light – the FCA does not take a position on Brexit per se, that would be inappropriate as a public body.

Whatever happens, as the UK becomes a third country it will operate under a system of equivalence, in the same way as other third countries. For me, the guiding principles for such an arrangement should be that we all do everything we can to preserve open financial markets, and particularly wholesale markets, supported by the strong international standards that have been refined or put in place since the crisis of ten years ago. I have said quite a few times before – and this is a personal view – that open markets and free trade are of such importance that we should set a strong example and not resort to the temptations of reciprocity.One broad outcome is to seek to stay closely aligned to the EU. There are good reasons for doing this: our markets are closely integrated and we have developed much of the EU financial services acquis[6] together. So we need to find a way to create the effective voice and practical involvement for the UK authorities when it comes to the shape and form of that future alignment. We can build on our close and effective working relations with authorities in the EU, but obviously we would need a framework in which to do that. That’s the 'no rule taker' point.

But those standards are, intentionally, not designed to cover all public interest issues affecting financial services. Rather, they are aimed at those areas where there are particular risks of spillovers that affect the stability of the financial system more broadly. Those are the areas where it makes sense to constrain discretion because of the risk of damaging spillovers, a point fully accepted by the EU, the UK and a very broad range of other countries.

The importance of free trade

What about the other legitimate areas of public interest where the risk is not international contagion and spillover? Here the risks are to the protection of domestic parties using overseas markets. It’s the distinction between the objective of financial stability (where spillovers matter) and market integrity (where domestic conditions matter). Here I strongly support the view that broad equivalence of protections should enable market access and not require unnecessary imposition of home country rules on business done elsewhere. This is part of a much wider debate about how we preserve and build open financial markets, into which Brexit comes as a catalyst to prompt faster determination of the way ahead. But, to be clear, it is not uniquely a Brexit issue – it is much broader than that. The key point for me here is that we – whether it be the UK authorities, EU, US or anyone else for that matter – should avoid a world where we regard it as normal to tell our market participants, corporate treasurers etc where they cannot and therefore can do business. I am an unashamed free trader.

My own view is that the principle of proactively recognising equivalence makes a great deal of sense, and is consistent with the arguments put forward by the EU in the context of Brexit in terms of not constraining domestic choices. So, it ought to have broad support, except probably amongst those who take a more mercantilist view and are prepared to sacrifice the principle of open markets, with which as you can see I strongly disagree.

I think that if we appropriately temper our approach to the domestic side of things by a commitment to seeking broadly equivalent outcomes, and our opposition to any suggestion of a race to the bottom – a bonfire of rules and the like – the protections can be made to work quite effectively.

Two tests for our future arrangement

Whatever approach we take, there are a couple of tests that I think the arrangement should need to pass. The first is that we can appropriately tailor our regulatory system to particular features of our markets. And second, we can change and adapt the system as markets change, and amend our rules when – as happens from time to time – they don’t quite work as we intended when applied in practice.

If I had to name an area where I would criticise the EU approach, it is the ability to amend and adjust and recognise the need to do so more rapidly. And, as evidence, I will introduce the Packaged Retail and Insurance-based Investment Products Regulation[7], PRIIPS to its fans. The aim of transparency and comparability of investment products is important, and we share it, but PRIIPS doesn’t work as well as it needs to. That’s just a fact of life. It’s why we have launched a Call for Input on PRIIPS[8] to get a more extensive picture of the issues. But we have also included in the Call for Evidence some quite stern language that we do not support any attempt to undermine the overall objectives, and we will not act on the basis of weak evidence. And I do not envisage that state of affairs changing with Brexit.

Lord Mayor, the FCA can help to lay out the choices, and we will put our full weight behind making whatever is chosen work. That’s what we must do as a public body. This is the seventh City Banquet that I have had the pleasure of speaking at. At the outset, the challenge was rebuilding financial regulation after the crisis. Today, I am pleased to say the system is much more robust to shocks, but we have some other challenges on our hands.