Brexit: financial services Contents

Summary of conclusions and recommendations

1.The legislation underpinning access to the EU market is based largely on the regulation of activities, and does not map easily onto the business structures of many firms. A better evidence-base is needed, and it is imperative that the Government gains a detailed understanding of how firms are likely to be affected by changes to their rights of access to EU markets, building where possible on the work undertaken by the firms themselves. (Paragraph 27)

2.It is striking that some firms do not themselves appear to be aware of their reliance on the current passporting arrangements. It would be in the interests of the firms themselves, as well as in the national interest, if they were to cooperate with the Government and the regulators to determine the true extent of such reliance, so as to inform the Government’s negotiating position. (Paragraph 28)

3.The UK has a number of advantages as a financial services hub. The concentration of activity allows for economies of scale and a depth of capital market activity that cannot be easily replicated, except possibly in an existing major centre such as New York. Our evidence suggested that it would be to the EU’s advantage that such a system should remain intact. (Paragraph 38)

4.The interconnectedness of the UK financial system presents serious difficulties for firms and the Government in determining the impact of changes to the relationship between the EU and the UK. Unless it is extended, the two-year period of the Article 50 negotiations would appear to be insufficient to resolve the uncertainty. We therefore recommend, both for the business environment and for financial stability, a considered and orderly transition to any new relationship. The earlier any aspects of this new relationship can be agreed the easier it will be to determine the impact on each sector of the industry. (Paragraph 39)

5.The existing third-country equivalence regimes in certain pieces of EU legislation are an inadequate substitute for the financial passport. They do not cover the full range of financial services activities, excluding in particular deposit-taking and lending, retail asset management and payment services. As they are agreed at a point in time, and are static, they may also be vulnerable should regulation change to respond to the development of the financial system. The process of updating them as EU-wide regulation changes would be laborious and time-consuming. (Paragraph 56)

6.We endorse the Government’s work in analysing the difference between the opportunities afforded by passporting and third-country equivalence. That analysis will be problematic, thanks to the complexity and newness of the regimes, but it will be crucial in determining the true impact of third-country status on the financial services industry. The priority should be to establish at an early stage the extent of the lacunae in the regimes, the likely restructuring that will have to be undertaken by businesses to adapt to changed circumstances, and the consequent effects of such adaptations on the financial services sector and the wider UK economy. (Paragraph 57)

7.If the Great Repeal Bill successfully ensures that the UK continues to apply EU legislation post Brexit the UK will, on a technical level, have a regulatory regime that is initially identical to that in the EU. However, it will remain for the European Commission to decide whether the UK is equivalent for the purposes of retaining market access. This process could be lengthy and could be politicised: the Government should seek agreement prior to withdrawal that the UK will be determined to be equivalent at the point of withdrawal, to avoid damaging disruption to financial services providers. (Paragraph 58)

8.While the UK might be deemed equivalent at the point of withdrawal, there is no guarantee that it will remain so. Regulation must adapt to changes in the financial services system, raising the risk of regulatory divergence between the UK and the EU, and indeed between the UK and the US. The UK’s influence on international standard-setting bodies, such as the Basel Committee and the Financial Stability Board, will be crucial to ensuring that changes to regulation are consistent internationally. But it is in the UK’s and EU’s mutual interest that the UK should maintain direct influence within the EU, especially in areas such as certain types of insurance, where there are less well-developed international standards. The Government should encourage direct regulatory cooperation between UK and EU authorities and, as part of its negotiation, should seek UK input to EU regulation-setting upstream. (Paragraph 59)

9.The current clearing regime provides benefits to the wider economy by aiding financial stability through the compression of risk and therefore of the collateral required to support trades. These benefits, which depend in large part on the ability to conduct multi-currency clearing, are felt in Europe as well as the UK and internationally. The possibility of a new attempt to require euro clearing to be conducted within the eurozone thus presents significant risk to both the UK and EU economies. Nonetheless, the ECB has attempted to do so once before and the risk of its doing so again should not be taken lightly, particularly in view of the jobs at risk. (Paragraph 75)

10.New York has been suggested as a plausible alternative to London for clearing activity, but a move to ‘repatriate’ euro-denominated clearing to the eurozone would appear to rule out New York as well as London, notwithstanding the positive equivalence decision already granted to the US. The question is whether any eurozone location could provide the same benefits to the wider economy as London and New York, and whether a politically-driven attempt to repatriate euro clearing to the eurozone would invite retaliation by other non-eurozone states, leading to the breakdown of the system of multi-currency clearing. (Paragraph 76)

11.The ability to continue to access to highly qualified staff and the ability to transfer them between the UK and the EU is a key issue for the financial services industry. While we welcome the Chancellor’s reassurance that highly skilled migrants will not be prevented from coming to the UK, as far as it goes, we note that maintaining appropriate labour market flexibility will be critical to the UK’s long-term economic prosperity. (Paragraph 82)

12.The FinTech industry has thrived in London, but could potentially move elsewhere. We note the concerns of the industry over future adherence to the EU data protection regime, and over its ability to recruit adequately qualified staff, and to attract the entrepreneurial talent needed for innovative start-ups. The Government should be particularly mindful of the opportunities for FinTech to develop further in the UK and of the effects of Brexit on a promising industry. (Paragraph 89)

13.A main purpose of any bespoke agreement, so far as financial services is concerned, will be to supplement the current equivalence regimes to mitigate any loss of access, and to ensure the continuation of equivalence decisions in order to maintain that access. The Government has acknowledged the complexity of predicting the impact of a bespoke deal. Nonetheless, we urge the Government, as a priority, to model the effect of different scenarios as accurately as is possible in order to achieve the most appropriate bespoke deal. (Paragraph 96)

14.Negotiations on the UK’s new relationship with the EU are likely to take longer than the withdrawal negotiations under Article 50. A transitional period will therefore be needed in relation to financial services following the completion of the Article 50 process, when the UK leaves the EU. This may need to be adapted and extended in the light of subsequent negotiations on a new long-term relationship with the EU. This will enable firms and others such as regulators to adapt to any new business conditions. (Paragraph 108)

15.It will be vital, in the interests of all parties, to provide certainty as early as possible in the process. Negotiations on financial services should commence as early as possible after notification under Article 50 and the Government should pursue an early announcement on a transitional period. This period should extend through the negotiations on the new relationship and continue thereafter for a period sufficient to provide stability after that relationship is agreed. The more the new relationship departs from the status quo the longer any further transitional period may need to be. (Paragraph 109)

16.We are concerned that, in the absence of clarity over the future relationship, firms may pre-empt uncertainty by relocating or restructuring, for instance by establishing subsidiaries or transferring staff, even though such changes may ultimately prove to be unnecessary. This would not be in the interests of the industry or the UK. (Paragraph 110)

17.An orderly transition to a new relationship, whatever it may be, would ensure continuity of service to clients and the wider economy and would provide time for regulators and supervisors to adapt to changes in business practices adopted by firms. Avoiding a cliff-edge when the UK leaves the EU will benefit financial stability, and should be in the interests of the EU as well as the UK (Paragraph 111)

18.In the interests of stakeholders across all sectors, the Government should provide clarity on the division of responsibility for the negotiations between departments. While the negotiating strategy must be agreed as a whole across Government, we are clear that HM Treasury is best placed to lead on financial services. (Paragraph 114)

19.We were concerned to hear that Brexit might already be having an effect, through diversion of resources, on the quality of legislation produced by the Government. Brexit is rightly the Government’s top priority, but not to the exclusion of other important responsibilities. (Paragraph 116)

20.The UK currently has a significant trade surplus in financial services with the EU, and it is to be expected that EU governments may wish to attract some of that business to their own territories. The efficiencies provided by the UK financial services industry, the reliance of EU firms on the services it provides, and the interdependencies between financial services and other EU businesses, mean that such efforts could be as harmful to the wider EU economy as to the UK economy. The Government should go into the negotiations armed with robust analysis of the economic impact on the EU of an attempt to dismantle and relocate UK financial services. (Paragraph 124)





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