Niels Kirst (Assistant Professor of European Law at Dublin City University)
Event Report by Niels Kirst, Assistant Professor of European Law at Dublin City University
On 22 May 2023, the Brexit Institute held an event in partnership with the European Economic and Social Committee (EESC) on the topic of European Union (EU) and United Kingdom (UK) financial services regulation post-Brexit in Brussels. This high-level event considered the recent developments in EU-UK financial services cooperation and was against the backdrop of a recent study published for the ECON Committee of the European Parliament. Furthermore, the event considered a draft Memorandum of Understanding (MoU) establishing a framework for financial services regulatory cooperation between the EU and the UK, published on 19 May 2023. Therefore, the event provided the perfect opportunity to discuss the most recent developments in EU-UK financial services cooperation.
The event started with a welcoming address by Antonio García del Riego, EESC Member and Independent Board Member of MiraltaBank. He started by welcoming the panellists and participants and mentioning the importance of this topic for the EESC and the EU. Afterwards, the chair of the panel Federico Fabbrini, Full Professor at Dublin City University (DCU) and Founding Director of the DCU Brexit Institute, addressed and introduced the roundtable participants. Those were Christy Ann Petit, Assistant Professor at DCU and Deputy Director of the DCU Brexit Institute. Andreas Heinzmann, Partner at the Luxembourg office of European corporate law firm GSK Stockmann. Massimo Zaffiro, Senior Official of the European Commission’s (Commission) DG FISMA, where he currently leads the team in charge of EU/UK financial services regulatory cooperation in the International Affairs Unit. And, finally, Antonio García del Riego, EESC Member and experienced banking executive.
The Roundtable
Christy Petit commenced her presentation by highlighting the findings of the study for the European Parliament “Recent trends in UK financial sector regulation and possible implications for the EU, including its approach to equivalence“, co-authored with Professor Thorsten Beck from the European University Institute (EUI). Outlining the report’s main findings, she mentioned that Brexit posed unique challenges for policymakers in the EU as the most important financial centre in Europe is now outside its regulatory framework and jurisdiction – in London. Three important recent evolutions have happened since the publication of the study. First, the changes the Windsor Framework brought about, which allowed a new atmosphere of mutual trust and cooperation between the EU and the UK; second, the forthcoming adoption of the draft MoU; and third, the new approach set out by the UK trade secretary regarding the Retained EU Law Bill.
The UK regulator approach will stress increasingly flexible, principles-based, and ‘smarter’ regulation. Divergence of UK regulation from EU regulation is a given outcome following Brexit, while both the UK and the EU wish to preserve their regulatory autonomy. She stressed the three scenarios of divergence from low, medium, to high divergence. The highest potential for divergence is where the UK is stressing growth opportunities – most importantly, crypto and stablecoins. In this regard, the strategy for growth and competitiveness is at the centre of both regulatory reviews and the trade strategy in the UK. Finally, she explained four different scenarios for future equivalence, from no equivalence to a relatively substantial equivalence (complete equivalence) – accounting for the unique equivalence that exists at this stage for the UK Clearing Central Counterparties (CCPs). Furthermore, she emphasised a new state of play between the low and medium divergence scenarios given the recent developments. Indeed, with the recently published draft MoU and the upcoming Joint Regulatory Forum, there is potential for a low divergence scenario.
Next, Massimo Zaffiro commenced his discussion by highlighting the current priorities of the Financial Services Commissioner Mairead McGuinness. Brexit meant a significant change for EU-UK regulatory cooperation in the financial sector. Further to the Joint Declaration on regulatory cooperation on Financial Services adopted by the EU and the UK alongside the TCA in 2020, negotiations at technical level were conducted and a draft MoU was adopted by the Commission on 17 May. Within the EU, the MoU needs to be endorsed by Council before it can be signed by the Commission. Once signed, it will establish a platform for structured regulatory cooperation, and will pave the way for regular meetings between DG FISMA and the UK Treasury as part of the Joint Regulatory Forum.
Further, Andreas Heinzmann continued with his comments from a practical viewpoint. He gave an overview of the current situation in the European Capital Markets Union (CMU) and the view for companies and businesses. European companies need funding. However, most of the funds are in London. He then talked about reverse solicitation and how these issues will be treated among the EU and UK in the future. Notably, the reverse solicitation scheme is no longer available. Therefore, the MoU is a glimmer of hope that the EU and the UK will come to a better situation and a solution. Overall, these challenges show that Brexit was solely a political decision and created many challenges for businesses and industries. Finally, being based in Luxembourg, he highlighted that the Luxembourg Government was thrilled when the MoU was released, as Luxembourg and London are highly connected financial centres.
Finally, Antonio García del Riego commented on financial services cooperation between the EU and the UK. His remarks focused among others on the European Central Bank (ECB). The ECB has no formal role in financial services cooperation between the EU and the UK. However, the ECB provides valuable insight into the future cooperation between the EU and the UK. The ECB has highlighted that the regulatory cooperation between the EU and the UK could become a race to the bottom or a race to the top. Specifically, around crypto and stablecoins, the UK is trying to place itself as a centre of development. The EU should aim to reduce reliance on London and become a vital ecosystem for financial services. Conclusively, mutual trust between both regulators will remain a crucial issue in the future.
Discussions and Q&As
Federico Fabbrini then opened the roundtable for all participants, allowing them to engage with the panellists. The questions mainly focus on the further opportunities coming out of the MoU once adopted, the issue of equivalence, and the political implications of regulatory cooperation between the EU and the UK. All participants agreed that EU-UK financial service equivalence is not driven solely by politics, but politics are always involved. Most participants expect a low-divergence scenario as outlined in Petit and Beck’s Report for the European Parliament. Federico Fabbrini concluded the discussion with the question whether the industry is pushing for divergence or, instead, for convergence. Ultimately, Antonio García del Riego highlighted that the trend of financial services moves toward the US, with US investment banks grabbing more and more market share both in Europe and globally. In fact, 60% of the market share in investment banking in Europe is in the hands of 5 US banks while 15 years ago their share of the pie was 40%.
In the end, Christy Petit summarised the main points of the roundtable. She stressed that EU-UK financial sector cooperation is a moving target with many ongoing developments happening. However, more significant trends have become visible. Notably, the trend under the new UK Government is towards more cooperation and coordination between the EU and the UK. The Partnership Event between the Brexit Institute and the EESC has underlined critical focal points and trajectories in the larger picture of the evolving EU-UK regulatory financial cooperation. The Brexit Institute will continue to critically monitor and assess these future developments in the years to come.
The recording of the event is available to browse.
Photo Credits: Iris Haidau, Reporters
The views expressed in this blog reflect the position of the author and not necessarily that of the Brexit Institute Blog.