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The UK-EU relationship in financial services Contents

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Chapter 3: Regulatory cooperation

Background: the UK-EU Memorandum of Understanding

106.Alongside the TCA, the UK and the EU published a Joint Declaration on Financial Services Regulatory Cooperation, in which the Parties committed to agreeing a Memorandum of Understanding (MoU) to establishing structured regulatory cooperation on financial services. The Declaration’s stated aims include “establishing a durable and stable relationship between autonomous jurisdictions” on the basis of “a shared commitment to preserve financial stability, market integrity, and the protection of investors and consumers”.140

107.The MoU would not, in itself, facilitate additional UK-EU market access. Rather, its purpose would be to provide a mechanism for high-level dialogue and cooperation, particularly between HM Treasury and the European Commission.141

108.Under the UK-EU Joint Declaration, the MoU was due to be agreed by March 2021. Although technical negotiations did conclude on 26 March 2021, over a year later, the MoU has still not been signed or entered into force.142

109.The EU Commissioner for Financial Stability, Financial Services, and the Capital Markets Union, Mairead McGuinness, has previously suggested that the non-finalisation of the MoU is related to wider disagreements between the Parties. Speaking in June 2021, Commissioner McGuinness said that “financial services are not isolated from the wider political relationship between the European Union and the United Kingdom” and added that, in a scenario where the UK was “abiding by its obligations and engaging in good faith … that will help us cooperate across sectors, including in financial services.”143 Similarly, in October 2021, she suggested that “had everything run smoothly and [if] the day-to-day trauma of Brexit was not in the headlines, this memorandum would be put into practice and we would have dialogue”.144

110.Most of the Committee’s witnesses to the inquiry similarly identified the wider UK-EU relationship, and specifically the dispute over the implementation of the Protocol on Ireland/Northern Ireland, as the key obstacle to the conclusion of the MoU. Referring to the Commissioner’s previous comments, Sam Woods of the PRA said “I think [that] is code for the Northern Ireland Protocol. I am not aware of any specific problems with the MoU itself.”145 Similarly, Miles Celic of the CityUK said he suspected that the delay was “to do with issues that are nothing to do with financial services”.146

111.The ensuing absence of a structured mechanism for UK-EU regulatory cooperation is notable given that both parties have similar mechanisms with other partners: both the UK and the EU have forums for regulatory cooperation with the United States of America on financial services, for example.147 Sir Jon Cunliffe of the Bank of England admitted how unusual that this state of affairs might appear: “If you came down from Mars and saw, in financial services terms, two large jurisdictions with very strong links … you would probably assume that there was some structured dialogue between them”.148

112.The Economic Secretary emphasised that the UK was ready to implement the MoU and that the delay was on the EU side: “It was ready to go in March 2021. The EU, for whatever reason, has not been in a position so far to sign up to that … We have co-operated fully. We negotiated in good faith. We are ready to sign up”.149

113.The Committee regrets the fact that the UK-EU Memorandum of Understanding on regulatory cooperation is still not in place, despite technical negotiations having concluded more than a year ago. The Committee notes the widespread view that the MoU has become a casualty of wider tensions between the Parties, particularly regarding the implementation of the Protocol on Ireland/Northern Ireland.

114.We consider the lack of a structured mechanism for regulatory cooperation on financial services between the UK and the EU to be particularly striking given that both the UK and the EU have established structured dialogues with other partners, notably with the United States.

115.We consider that the Government’s overall objective should remain the earliest possible entry into force of the Memorandum of Understanding and that, as and when it enters into force, the Government should make the fullest use of the dialogue established to work for effective cooperation with the EU in this important sector.

The importance of the Memorandum of Understanding

116.There was a general consensus among the Committee’s witnesses that, while full implementation of the MoU would be beneficial, its absence had not caused major practical problems so far. Richard Fox, Director of International at the FCA, said he would “broadly agree” with the characterisation of the MoU as advantageous rather than essential, adding that, as regulators, “there is no immediate impediment to us doing our jobs well”.150 Sir Jon Cunliffe expressed similar sentiments, stating that “its practical significance in providing access for trade is relatively small”.

117.Some witnesses further argued that the sector no longer saw the MoU as a top priority. Andrew Pilgrim of EY said it had “been such a long time coming that many have now almost forgotten about it … To an extent, the world has moved on”.151 Lord Hill, former European Commissioner for Financial Services, said the MoU was “not essential because life has carried on without it”, though he added, “it is the kind of thing that can help”.152

118.In addition, some witnesses pointed to limitations with the MoU itself. New Financial wrote that its potential scope was “less ambitious than the existing agreements between the UK and US … or the EU and US”.153 Rachel Kent of Hogan Lovells also emphasised that one of the aims envisaged for the MoU had been “governance, dialogue and process around equivalence decisions”, decisions which have not ultimately been forthcoming.154

119.Furthermore, Sir Jon Cunliffe told the Committee that the MoU “is not the only channel for raising something” with the EU, highlighting in particular that “We and the EU are both active participants in international fora”.155

120.Nevertheless, there was general agreement that implementation of the MoU would still have strategic value as a mechanism for structured dialogue.156 Sir Jon Cunliffe said that “having a structure for that sort of interaction and dialogue is important”, adding, “We can certainly find ways to talk to [the EU], but we lack an umbrella-structured dialogue to do so, and that makes a difference at the margin.”157 Miles Celic’s sentiments were similar: “it seems to be working reasonably well without that structure in place, but our sense is that it would be better to have the structure”.158 For the PRA, Sam Woods was clear: “Do we need it for day-to-day supervision? No. Would it be a good thing to have? Yes”.159

121.Moreover, in the context of potential UK-EU divergence, there was a sense that, even if the absence of the MoU has not been keenly felt yet, its real value would come in the future. The City of London Corporation stressed this point: “strong regulatory and supervisory dialogue and cooperation will be so important as our respective regulatory regimes evolve over time”.160 The London Market Group also wrote that continued regulatory dialogue could “help to manage this process of divergence”.161

122.The City of London Corporation also highlighted the value of the MoU as a mechanism for discussing “common challenges”, such as tackling climate change and responding to the digitalisation of the economy.162 In a similar vein, Lord Hill raised the wider question of cooperation between democracies in the context of global events such as the Russian invasion of Ukraine: “what we have seen during the current crisis is that the financial system, the payment system, is part of defence and security”.163

123.The Economic Secretary, however, was reluctant to be drawn on the value the MoU would add beyond existing ad hoc cooperation: “We have the opportunity for dialogue with various people around financial services … we have very strong relationships across the continent.”164

124.The Committee acknowledges that the non-implementation of the Memorandum of Understanding does not appear to have posed major practical problems to date, particularly as it is a tool for political cooperation rather than something that, in itself, facilitates market access. However, the Memorandum of Understanding would provide a useful mechanism and structure for future strategic dialogue and cooperation between the UK and the EU, and the Committee considers that its implementation would benefit both sides.

125.We caution the Government against complacency in this area. Despite the limited impact of the non-finalisation of the Memorandum of Understanding to date, its real value is likely to be found in the future as the UK and the EU diverge, particularly in the event of cross border financial services developments and potential future crises that may require transnational solutions.

Bilateral and multilateral cooperation between regulators

126.Separately to the UK-EU MoU, a separate series of bilateral MoUs are in place between UK regulators and supervisors and their counterparts in the EU institutions and Member States. The FCA, for example, has agreed bilateral MoUs with the European Banking Authority and the European Securities and Markets Authority; a multilateral MoU with EU and EEA National Competent Authorities; and individual MoUs with National Competent Authorities.165 Edwin Schooling Latter, Director of Markets and Wholesale Policy at the FCA, described this as “a pretty complete tapestry of MoUs”, while Andrew Pilgrim said it was “a huge network of MoUs … almost a clean sweep”.

127.Witnesses to this inquiry, including the regulators themselves, explained that these lower-level MoUs facilitate regulator-to-regulator dialogue on a technical level, whereas the overarching MoU would facilitate higher-level strategic discussions between the Treasury and the Commission.166

128.These regulator-to-regulator MoUs are in place and, according to the UK regulators, are working well. Edwin Schooling Latter said that these fora had facilitated “a lot of really important conversations with our EU counterparts about issues of common concern”, including recent cooperation on sanctions against the Russian Federation following the invasion of Ukraine. Nathanaël Benjamin, Executive Director for Authorisations, Regulatory Technology, and International Supervision at the PRA added, “We almost forget that the MoUs are in place because we have got into a mode of interacting quite openly, regularly and constructively with our counterparts”.167

129.Several witnesses argued that, at a technical and day-to-day level, these MoUs were of greater significance for regulators and firms than the overarching MoU between the UK and the EU. Caroline Dawson of Clifford Chance said, “From my clients’ perspective, their relationships are with their direct supervisors and regulators … Those are the MoUs that probably have the most direct impact on my clients’ business”.168 For the FCA, Richard Fox told the Committee that “the more important set of relationships we have is arguably with our direct counterparts doing the regulation and the supervision in the different countries across the European Union and, indeed, with the number of authorities that span the European Union.”169

130.The Committee welcomes the series of bilateral Memoranda of Understanding that have been agreed between UK and European regulators and supervisors at both EU-wide level and Member State level. These appear to be working well and have meant that day-to-day regulatory and supervisory cooperation has continued despite the lack of a higher-level UK-EU Memorandum of Understanding.

Political and diplomatic cooperation

131.As well as formal structures, ad hoc UK-EU cooperation on financial services can also take place at political and diplomatic levels. During the Committee’s inquiry, for example, Commissioner McGuinness met the Economic Secretary on 16 March 2022, and the Governor and Deputy Governor of the Bank of England on 29 March 2022.170 New Financial argued that these meetings represented “encouraging steps towards ‘normalisation’ in these relationships”.171 In addition, the Economic Secretary also highlighted his bilateral engagements with his counterparts in Member State capitals, such as Madrid and Luxembourg.172

132.However, despite the Economic Secretary’s recent meeting with the Commissioner, it emerged that the two have not established any regular or structured pattern of meetings. The Minister told the Committee: “I had a conversation with [the Commissioner] a couple of months ago and I am sure we will speak again. We do not have a fixed moment where we agree to speak, but it was a very professional and cordial conversation about issues of mutual interest.”173

133.Alongside formal regulatory cooperation, the Committee urges the Government to increase its political and diplomatic engagement on financial services both with the European Commission and with key Member State capitals.

134.While welcoming news of the Economic Secretary’s recent meeting with the European Commissioner for Financial Services, we are concerned that such meetings are not taking place with the structure or regularity needed for close UK-EU cooperation. Notwithstanding the importance of establishing a more comprehensive structure for regulatory cooperation with the EU, we therefore recommend that these meetings take place at least once a year and are used as a forum for discussing regulatory cooperation and raising any issues of concern.

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