Regulatory co-operation between the UK and US: now and in the future

Speaker: Nausicaa Delfas[1], Executive Director of International
Event: BritishAmerican Business Transatlantic Finance Forum, New York City
Delivered: 11 June 2019
Note: this is the speech as drafted and may differ from delivered version

It is a pleasure to be here in New York City, participating in this panel today, and speaking about regulatory co-operation and coherence between the UK and the US.

BritishAmerican Business and the City of London Corporation have always been important voices when discussing regulatory co-operation and coherence – a matter which is of importance not just for regulators, but for market participants, and wider society.

UK/US are globally important and interconnected financial centres

The UK and the US together represent the two largest financial centres in the world. London and New York are ranked the top two financial cities and four-fifths of the world’s over-the-counter (OTC) interest rate derivatives are written in the UK or in the US – according to the Bank of England[2] this represents around $1.2 trillion of notional value every day.

Analysis carried out by The CityUK,[3] a UK based trade association, showed the US is the UK’s largest single trading partner for financial services, receiving nearly 20% of the UK’s financial services net exports, twice as large as the next.

More than a third of the non-EEA branches we regulate are from the US. And one-third of the £230 trillion notional OTC derivatives at UK Central Counterparties (CCPs) come from US clearing members, as shown in the Federal Reserve Bank of New York report into derivatives transactions[4] 
– more than any other international jurisdiction. Derivatives can seem very far removed from the everyday concerns of households, but they are essential. After all they allow our pension funds and banks to manage interest rate risk, meaning lower costs for borrowers – and they allow our companies and exporters to manage credit and exchange risks helping them to be more efficient and resilient.

The stability and resilience of our markets are therefore heavily connected to our economic prosperity – and common standards and close regulatory cooperation can support global financial markets.

This underlines both the value, and importance, of close regulatory cooperation – both bilaterally and through international standard setting bodies such as the Financial Stability Board (FSB) and International Organisation of Securities Commissions (IOSCO) – to set standards that underpin and support global markets. And we start from a strong position – our common cultural approaches and legal traditions have fostered a particularly close relationship. One that is underpinned by a support for open markets and strong international standards.

Strong and coherent regulatory standards play a key role in supporting global markets

The importance of regulatory co-operation and coherence is not new – a lesson of the financial crisis is that effectively regulating the financial sector and ensuring high standards is of paramount importance to economic security and confidence in the system worldwide.

The FCA itself is a strong advocate for successful, open, global financial markets, with regulation that underpins free trade, pointing away from tying markets to locations.

We now find ourselves however in a complex period for global policy making. For a long time, there has been strong international consensus built around the value of cross-border co-operation. But the geo-political environment today is less predictable – and more questions are emerging around that consensus.

Over the last few years the US, EU and the UK have each engaged in significant exercises of financial regulatory self-evaluation. In the US, we’ve seen the development of the Core Principles reviews[5], while in the EU, the European Commission issued a call for evidence[6] on the impact of the post crisis regulatory reforms.

Meanwhile for us in the UK, Brexit is one of the factors (alongside others such as technology) that inevitably raises important questions about the future of regulation. Outside the EU, the UK regulatory system could evolve in placing a stronger focus on outcomes rather than a strict rules-based approach, which is more in line with our common law heritage and approach.

However, underpinning all this remains for us the critical importance of global cooperation and standard setting. It is through this cooperation that our respective regimes remain aligned in outcomes, even if not in technical detail, which enables free trade to flourish. And by enabling free trade to flourish, we create tangible benefits for our economies – lower costs of doing business, more competition (and with it, innovation), increasing liquidity, and ultimately lower prices for the end consumer.

This approach was advocated following the financial crisis by world leaders through the G20. The UK and US together have played a critical leadership role since 2009 to ensure close co-operation within the parameters of refining their own sets of regulations.

Regulatory cooperation will remain paramount

In the UK, our work on preparing for Brexit has reiterated the importance of regulatory co-operation, as a means of ensuring not only effective oversight, but also market access and continuity. Our aim has been to ensure as smooth a transition as possible in the event of leaving the EU, in any scenario, including one in which we leave without a deal – a possibility which still remains, at 31 October this year.

We have focused on ensuring continuity, including access to the UK’s markets - through enabling firms and funds that currently passport in from Europe, to continue to do so; through the Memorandums of Understanding (MOUs) we agreed with EU counterparts we were able to ensure the continued operation of the global delegation model in asset management; with our US counterparts, we recently amended our MoUs with the Securities & Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) and agreed to roll over substituted compliance and equivalence decisions to ensure continuity post Brexit. I am grateful to all our counterparts for enabling this work to be completed so quickly.

And as has been clear to me in working on a number of issues over the past year, I can honestly say the US and UK are working closely together to solve challenges in both jurisdictions, adopting a common outlook.

It is through this approach that we have seen progress on issues such as London Inter-Bank Offered Rate (LIBOR) reform. The UK and the US are working closely together on plans to transition away from LIBOR to alternative risk-free rates. Even though, on the face of it, problems around LIBOR transition are in some ways different in each of our markets (notably given the large number of retail mortgages referencing LIBOR in the US), our markets are interconnected, and we are making the most of areas where there is alignment, with close co-operation and communication.

And last month, I represented the FCA at the second US/UK regulatory financial dialogue in Washington DC, hosted by the US Treasury, and attended by HM Treasury, and British and American regulators. It was clear there that our thinking on market access and regulation were very much in line:

• We talked about tools for market access such as: substituted compliance, exemptions, registration requirements, and no action relief.
• A transparent assessment against core principles (rather than detailed rules) – which in itself drives outcomes based equivalence considerations.
• A proportionate – or calibrated – approach to regulation, taking account of risks that firms pose.

We also covered many – non-Brexit related – issues such as transition from LIBOR; the UK’s new resolution framework; the work of the US in moving to new models of assessing prudential risk; the green agenda and the impact of climate change on the financial sector.

The dialogue culminated in the announcement of a new Financial Innovation Partnership. This builds on the extensive work that has been taking place in both our countries on identifying the new innovative trends and working out how we can best supervise the fintech sector – whilst continuing to meet our objectives of protecting the public and promoting well-functioning markets.

What the new Partnership will do is not only foster regulatory cooperation between us, but it will also see the development of commercial trade missions led by UK’s Department of International Trade, and the US Department of Commerce, involving regulators as appropriate.

Our cooperation with the US goes beyond specific sectoral issues. As mentioned earlier, both the UK and US have played a key role in steering the G20 agenda, as well as those of the global standard setting bodies. With Randal Quarles as chair of the Financial Stability Board, we are working with US and other colleagues to address risks arising from market fragmentation.

This is a really timely area to be looking at market fragmentation – it can be caused by varying implementation of global standards, or restrictive domestic rules – and can restrict the free flow of financial services activity, has the potential to reduce liquidity, increase fragility and reduce operational efficiencies. To address this, we are looking at how to reduce fragmentation and market barriers, through enhanced cooperation between regulators, and greater clarity around the use of deference tools where it is appropriate to do so.

Whilst I am speaking today on the relationship between the UK and the US, we also need to look at regulatory cooperation beyond just our markets. The EU has a vital role to play here too and for the same reasons that I’ve outlined earlier, it’s in all of our interests for all of our jurisdictions to remain open to the rest of the world.

I hope it goes without saying that whatever the outcome of Brexit, our relationship with our EU counterparts will remain strong. While we remain an EU Member we will continue to be an active participant in European Securities & Markets Authority (ESMA) and work closely with our EU27 counterparts on legislation that is in development. Wherever we end up, our markets will remain closely linked – we have a high concentration of EU financial services in London and vice versa and that will not change overnight. Our close cooperation with our EU counterparts in order to meet our objectives will continue after exit.

In our view, the UK and the EU should be able to find each other equivalent on day one by virtue of having the same legislation and well established supervisory approaches; and as our rulebooks evolve we will both want to ensure predictability around issues such as assessment processes or withdrawal of equivalence in a similar way to, but hopefully even deeper than the way that the EU has worked with the US and more recently Singapore.

Outcomes-based approach

In other words, whilst our respective regimes may not be identical, strong regulatory cooperation, coupled with rules seeking to achieve common outcomes, are essential ingredients for supporting open markets.

Where markets are cross-border, we co-operate to ensure frameworks are consistent in terms of outcomes, and that opportunities for regulatory arbitrage are minimised. Where markets are more local, we share best practice and promote common approaches wherever appropriate.

It’s under this approach that we’ve led on establishing cooperation agreements on fintech. More recently we signed the Mutual Recognition of Funds agreement with the Hong Kong Securities and Future Commission (SFC). This is the first of its kind for the FCA. The agreement essentially helps funds in Hong Kong to market UK customers – and vice versa – if they can demonstrate broad equivalence or equivalent outcomes to our own retail fund rules – not identical rules.

This is a significant agreement because it offers customers a more dynamic market with greater diversification. It also demonstrates how integral this kind of approach is to economic stability, growth and effective competition.

CFTC Chairman Chris Giancarlo, who only last week spoke of our constructive engagement in London, has been instrumental in supporting proposals for closer cross-border cooperation and a greater use of deference where regulations deliver broadly equivalent outcomes. With the US, we begin with the same shared objectives – that regulatory standards in financial services should support the functioning of markets, consumer protection and innovation.

To conclude – our markets are vibrant and interconnected, innovative and driving prosperity for both the US and UK. Whilst Brexit will create challenges, London will remain an important international centre and a hub for global firms.

And whatever the outcome, you can expect the FCA to continue to champion high standards, international coherence and open markets, and that we will continue to build on our strong relationships with both US and EU regulators.