No-one needs a reminder that the UK will leave the European Union (EU) in less than 12 months’ time. Unsurprisingly, the recent Financial Conduct Authority (FCA) annual business plan described Brexit as being one of the regulator’s top priorities, and as something that will require a significant amount of resource.
In late April 2018, FCA chief executive Andrew Bailey spoke in depth about the post-Brexit financial landscape when he addressed City Week’s International Financial Services Forum at London’s Guildhall.
Mr Bailey began by urging “the UK and EU authorities to come together and work on the solutions to reduce the risks to financial stability that Brexit could pose.” He welcomed proposals for a transition period of up to two years after the official Brexit date, saying that the absence of an orderly transition would give rise to “risks around contract continuity, data sharing, and broader market disruption” and said that these “could jeopardise financial stability.”
The FCA chief warned however that he could not promise that agreement would be reached on the terms of such a transition period, and that therefore contingency planning was taking place for a “cliff edge” scenario, i.e. one where the UK is a full member of the EU at 10.59pm on March 29 2019, but by 11pm on that day would cease to be a member and have no form of trade deal or other co-operation arrangement in place with the 27 remaining EU states.
In the next section of the speech, he opined that “closing access to financial markets which are global not regional will undermine not enhance financial stability.” He added that the City of London was an example of a massive global financial marketplace and speculated as to what degree of access EU financial institutions would have to the City after Brexit.
Mr Bailey recognised that “equivalence” of regulation was not feasible, as that would involve the UK continuing to have the same level of financial regulation as the rest of the EU even after its exit, when the whole idea of Brexit is for the UK to be able to make its own rules. He instead proposed a system of “mutual recognition” and noted that the UK and the EU would have equivalent regulatory frameworks on the day of Brexit itself. He then suggested how mutual recognition could work, by saying:
“Both the UK and the EU will retain autonomy in rule making, but we should put in place cooperation and coordination structures that work to keep them materially consistent.”
He concluded by saying that “now is the time for the UK and EU authorities to come together and work on the solutions to reduce the risks to financial stability that Brexit could pose.”
A continuation of the existing passporting regime appears to have been ruled out by politicians from both the UK and the EU. Under passporting, anyone authorised to carry out financial services activity within one member state of the European Economic Area is automatically authorised in all member states without the need to obtain separate authorisation from each national regulator.
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