Global regulation, local solutions

Speaker: Nausicaa Delfas[1], Executive Director of International
Event: BCLP, London
Delivered: 23 January 2020
Note: this is the speech as drafted and may differ from delivered version

Highlights

• Brexit withdrawal agreement
• Bilateral engagement and financial dialogues

This is a timely opportunity for me to cover our approach to international regulation, and our next steps on Brexit, as we are due to leave the EU in a week’s time and to enter the implementation period.

The theme of your conference is 'global regulation, local solutions'. Global regulation is crucial to ensuring firms can compete on a level playing field across jurisdictions, and to reducing opportunities for regulatory arbitrage. But in practice, the reality is international regulation will always have a local element, and solutions have to be tailored to local markets to achieve the right outcome. And ultimately outcomes are what matter most.

National authorities need to be able to do what is right in their jurisdiction rather than rigidly applying identical requirements country-by-country. And of course, regulation has to have a local element for practical reasons. For example, requirements around mind and management reflect the importance of local accountability for decisions taken locally. Or the need for documentation to be in local languages or otherwise suited to the culture of the local market. However, these local solutions can cause higher compliance costs for firms operating internationally. The need for a local element shouldn’t be used as a blanket justification for local implementation that leads to inconsistent outcomes or increased costs for firms or their clients.

We can and want to do more to reduce these burdens, and are taking pragmatic approaches to achieve this where we can. The FCA has, along with all other UK authorities, consistently argued for broader and stronger international standards. Since the financial crisis and with the creation of the Financial Stability Board (FSB) over a decade ago, UK policymakers have been at the forefront of establishing standards – for example, the regulation of benchmarks, banking and insurance capital requirements, and resolution regimes.

Ten years on, we should take stock of where we are – and consider not just what has been implemented but how. The quality and consistency of local implementation is critical to the success of these reforms.

The FSB’s latest annual evaluation found a high level of implementation in a number of areas, including those rules relating to bank capital and liquidity. It also found near full compliance in areas such as compensation rules and derivative trade reporting.

But there is more work to be done to ensure implementation is consistent, both in the form and adoption timetable of international standards. In his latest letter to G20 Ministers, the FSB Chair Randal Quarles reiterated that work on the G20 reforms was far from complete.

Addressing uneven progress and ensuring reforms are working as intended remains a priority. Evidence of the commitment to this can be found in the ongoing international focus on market fragmentation, which remains a priority of both the International Organization of Securities Commissions (IOSCO) and the FSB’s agendas.

The risks of market fragmentation are well known: increased costs for firms, potentially weaker or complex oversight for regulators, and opportunities for firms to engage in regulatory arbitrage. The IOSCO market fragmentation report, released last summer, looked at areas of uneven implementation such as trade reporting requirements and the problems caused by variations in data field format and scope. On the same topic, the FSB also considered the problem in relation to cyber risks and stress testing.

So avoiding needless fragmentation is now a key part of policy making. For example, on the emergence of so-called stablecoins, the FSB and IOSCO, as well as other international organisations, have launched dedicated workstreams to facilitate open discussion and information exchange between regulators, encourage a coordinated approach, and ensure that local action is informed by international thinking.

International work on market fragmentation has the potential to realise significant benefits for authorities and firms. We will play our part in encouraging practical solutions to these issues.

Brexit 

The work on market fragmentation will take on a new dimension as the UK leaves the EU, as it is clear that Brexit will bring about a number of changes for our firms and markets.

With the withdrawal agreement between the UK and the EU now likely to be passed, this will mean that:

• a no-deal exit will not happen at the end of January 2020 and we will enter an implementation period
• EU law will continue to apply throughout 2020, and passporting will continue as now during that time. Consumers’ rights and protections will also remain unchanged

It also means that:

• the UK and the EU will begin discussions on the future relationship including the Political Declaration commitments to conduct mutual equivalence assessments by mid-2020
• firms still need to ensure they are prepared for a range of scenarios that may happen at the end of 2020 – and this includes the scenario in which the activities they conduct might not be covered by agreements reached between the UK and the EU
• as we have done over the past 3 years, we will keep firms and consumers updated during 2020

Of course, our future trading relationship with the EU is still to be negotiated and agreed, and we are just at the beginning. We stand ready to provide technical advice, in line with our objectives to Government on any free trade agreements it negotiates with the EU.

Commentators sometimes suggest that we will have either equivalence with EU rules, or diverge. The reality is not so binary. For countries independently assessing each other for equivalence, they will generally not start with the same set of rules. The key question for any assessment of any third country is ‘do the rules achieve equivalent outcomes?’. As stated in the Political Declaration, both the UK and the EU have committed to outcomes preserving financial stability, market integrity, investor and consumer protection and fair competition.

Our work to onshore the EU rulebook means that on Day 1 the UK will have the most equivalent framework to the EU of any country in the world. This provides a strong basis for the EU and UK to find each other equivalent across the full range of equivalence provisions. And in future, it is not about whether we have identical rules but whether they achieve common substantive outcomes. This is the established model currently used by the EU and it’s an approach we strongly support. 

And we believe that equivalence decisions should be based on technical assessments. By grounding equivalence decisions firmly in an understanding of the other jurisdiction’s regulatory regime, we ensure stability and transparency for all involved. A conclusion that the other party’s regulation does not provide the same substantive outcomes, must also be open to reasonable challenge and therefore be given with appropriate warning. And any resulting changes to market access must also be consistent with those objectives. 

We also recognise that the current equivalence regime does not provide for access in some key areas. As both the UK and EU are committed to open markets, there is also a strong rationale for both sides to discuss broadening their respective equivalence frameworks. 

We should also consider how we can best cooperate at a supervisory level, to provide comfort about firms which may be doing cross border business, whether under equivalence or a national regime.

Bilateral engagement and financial dialogues

Now to look to the future, and forging new relationships with the EU and the rest of the world.

Regardless of where we end up, the FCA will continue to engage with the future EU agenda. This is because we share common regulatory and supervisory priorities, challenges and concerns. This includes such areas as next steps with EU Capital Markets Union, where building strong and open capital markets is in the interests of Europe as a whole. It includes investor protection standards, sustainable finance, the fight against money laundering, financial innovation and the future regulation of cryptoassets – some of which I see are covered in your emerging themes published today.

The FCA is a global regulator and many of the markets and firms we regulate are global. We support open markets underpinned by strong international standards. This will not change when we leave the EU, and our focus on international cooperation and standard setting will increase. As well as our multilateral engagement through standard setting bodies such as the FSB and IOSCO, we have developed a strong programme of bi-lateral engagement to shape international standards and best practice. For example, we participate in a number of Government-led Financial Dialogues with regulators from several major global financial centres, such as Singapore, Japan and US.

We will continue to work closely with Treasury as they develop their global engagement agenda. This will include ways in which we can enhance our regulatory cooperation with key jurisdictions and explore options for new mechanisms for cross border market access.

A recent example where the FCA has taken forward work to support market access is the Mutual Recognition of Funds agreement we signed with the Hong Kong Securities and Futures Commission. 

It supports reciprocal access to each other’s jurisdiction for the marketing and distribution of investment funds covered by the scheme.

The agreement was made on the basis that Hong Kong and UK rules aim to achieve equivalent outcomes to each other. Close and ongoing regulatory cooperation is key to the success of this scheme, and other similar market access arrangements. We therefore support HM Treasury’s aim of deepening cooperation with other financial centres.

Conclusion

Without doubt, we face another interesting year ahead. We in the FCA are preparing ourselves for all scenarios. We are ready to adapt to the new environment post Brexit. 

But some things won’t change. We have always been an international regulator in outlook, regulating global markets with a strong focus on consumer protection. We will continue to engage and lead debates at the global level. We will continue to work closely with our EU partners. And we will continue to evolve our approach to regulation. Whether it be for new issues that are arising such as sustainable finance or cryptoassets, or for existing regulation and how we move to more outcomes-based models of regulation as we have talked about in recent months.

And so I finish where I started. We will continue to promote global solutions to policy problems. 

And we will continue to work to ensure that where local solutions are needed, we pursue a pragmatic and risk-based approach.