John Rega , Chief Correspondent, Financial Services , MLex | Nov 2016


All of Europe, including the EU and its neighbors, should also create a Continent-wide agency to draft rules for banks and markets, said Swinburne, a Conservative in the European Parliament. That would help the EU and Britain work out mutually acceptable rules after the UK leaves the union, to let companies do business across the English Channel, she told an industry conference* earlier this month.

Setting more detailed standards in global organizations, or in a pan-European format, could help head off discord that Swinburne blamed on the EU’s “byzantine, behind-closed-doors approach” to cooperating with other jurisdictions.

Most EU legislation on financial services allows companies from outside to operate in the bloc without having to set up offices overseen by local regulators — but only if those companies are based in countries that the European Commission deems to have “equivalent” rules and enforcement. That leaves many smaller countries lagging behind bigger markets as assessments are carried out, country by country.

The procedure can also create obstacles for bigger countries, as with the trans-Atlantic spat over derivatives market, in which the commission sparred with US regulators for several years over requirements for clearinghouses (click here to read related coverage).

Financial centers and authorities around the world would be better off, Swinburne and other conference speakers said, if global regulatory bodies were to work out more of the details in their standards. Less national leeway in implementing those measures would mean fewer chances to diverge over the minutiae, as with the derivatives clearinghouses.

Global arbitration

Some areas in global discussions are already getting more detail, such as standards for emergency recovery plans at clearinghouses, designed by the International Organization of Securities Commissions (see the case file here). Enforcement remains a gap that would need to be filled before jurisdictions could rely on each other more easily, Swinburne said.

“We need to consider whether or not there is a global forum [to] which we could give binding powers of arbitration between jurisdictions,” she said. That body “would replace the awkward and cumbersome regime of equivalence and indeed the US’s system of substituted compliance.”

Unless other arrangements are made, European procedures for granting equivalence could be a pitfall for UK companies seeking to provide services in the EU after the country’s withdrawal, as soon as 2019.

The UK and the EU need “a bespoke agreement” to maintain close relations in financial services, Swinburne said, as equivalence may be hard to rely on, while other existing alternatives have unpalatable side effects.

Swinburne said Britain wouldn’t accept a form of quasi-membership by joining the broader European Economic Area, which brings Norway, Iceland and Liechtenstein together with EU member states.

That would let UK firms keep their “passports” to trade freely in the bloc (click here for coverage of passport holders). But joining the EEA would force the region’s biggest financial center to apply EU rules, without having a say in drafting them.

Makers not takers

Today, UK negotiators greatly shape EU financial laws, while its regulators — including the Financial Conduct Authority — are influential in drafting the technical regulations to flesh them out.

“The FCA and the Bank of England are rule makers, not rule takers,” Swinburne said.

Both sides have an interest in avoiding a split in the market, she argued, saying European companies “would face significant costs and burdens” if they had to set up shop in the UK, in case British rules aren’t deemed equivalent.

The UK government hasn’t set out its plans for the Brexit talks with the EU, other than committing itself to triggering the exit negotiations under treaty rules by the end of March. Activating Article 50 of the Lisbon Treaty would lead to a divorce after two years of talks, unless members agree to extend the negotiations on the future relationship.

Richard Knox, deputy director for securities and markets at the UK Treasury, told the same conference that the financial industry “will be a high priority” for the British government in the discussions.

“We will look to secure the maximum openness we can,” he said on a panel with Swinburne and other speakers.

‘Maximum openness’

Britain will at least start with rules identical to the EU’s, Knox added.

Yet any change could cost the UK its equivalence. That’s where a Europe-wide body could help in uniting rules — not necessarily harmonizing every detail — beyond the EU, Swinburne said.

Such a group could replace the EU regulatory authorities that now draft the detailed secondary legislation that fleshes out the bloc’s financial laws. Membership could include a post-Brexit UK and neighbors such as Norway.

“Everyone should sit around the table,” said Bente Landsnes, chief executive of the Oslo Børs securities exchange, speaking on the panel with Swinburne and Knox. “All of us will be losers if we can’t get our act together.”

* WFE General Assembly & Annual Meeting, held by the World Federation of Exchanges in Cartagena, Colombia, Nov. 3 and 4, 2016
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