TheCityUK, a membership body of the UK financial markets, issued on Thursday a list of key priorities that UK-based financial market participants need to address in relation to the forthcoming Brexit negotiations. The list aims to put an emphasis on topics that need to be addressed so that both the UK and the rest of the EU countries achieve the best possible deal.
After on on 23 June, 2016, the UK voted to exit the European Union (aka Brexit vote), financial institutions across the EU, and in the UK in particular, are facing significant challenges. A license issued by UK’s Financial Conduct Authority (FCA) currently provides admission to all countries in the European Economic Area (EEA), but soon FCA license holders will loose access to these markets.
The presented priorities aims to engage market participants with the UK government and to help deliver a smooth Brexit and maintain the UK’s position as an attractive place to do business.
“There is no question that getting Brexit right is a once in a generation challenge. If there is anywhere in the world which has the necessary knowledge and expertise to get this done, it is here in the world’s leading financial and related professional services hub,” Said Miles Celic, TheCityUK CEO, adding that the membership body has worked together with the UK government in identifying the priorities. “We have been clear to stress these should include interim arrangements, access to global talent and expertise, and a bespoke deal based on mutual recognition and regulatory cooperation. Ultimately, the best Brexit deal will be one that reduces uncertainty and enables businesses to continue to best serve customers and clients,” he noted.
Following are the 17 key priorities presented by TheCityUK:
- The UK and the EU should conclude a bespoke agreement that delivers mutual market access, transitional arrangements to allow for enough time to implement the new relationship and access to talent. As part of TheCityUK’s work to define the shape of the bespoke deal, this paper sets out key considerations on each of these areas. There will be opportunities arising from Brexit, including from new networks of trade and investment agreements, the creation of Sharia-compliant central bank liquidity facilities and FinTech. Further detailed information is available on TheCityUK’s website.
- The UK-based financial and related professional services industry is a significant contributor to UK-wide prosperity. It is also an enabler to the wider economy. Evolving over many years, there is now an interdependent and interconnected ecosystem made up of an extensive range of businesses providing world-class services and advice. This brings significant benefits to the millions of corporations and households it serves globally. Its inherent strengths include the breadth of the investor base, innovative large and small companies, regulatory and legal integrity, experience and global talent.
- Customers and clients from across the UK, the EU and beyond benefit from the UK’s capital markets enabling investment in infrastructure and technology, as well as from its world-class advice and from its investment in business growth plans. A well developed world-class retail and institutional asset management industry allows pensions and assets to be invested for the future. Many customers benefit from the industry’s current unfettered access to the EU Single Market. While respecting sovereignty and immigration control as prerequisites, the UK’s exit from the EU should aim to maximize access to EU markets for the products and services offered by providers in the UK to EU customers and vice versa.
- Post-Brexit, the UK Parliament will have control over UK legislation and the ability to design a framework that is appropriate for UK-based businesses and their customers. In order to preserve global markets and maintain the flow of financial services, it is clearly in the interests of both the UK and the EU to ensure continued deep and ongoing regulatory and supervisory cooperation between authorities across the globe. Where appropriate, harmonized approaches should be maintained to avoid businesses trading and operating in the UK and the EU having to comply with different, and possibly conflicting, regulatory obligations. Similarly, cross-border regulatory recognition which allows UK firms to provide professional services, such as audit, to EU companies should be agreed. Where harmonization is not appropriate, activities carried out in the UK by EU business will be subject to UK jurisdiction and vice versa. This is consistent with globally accepted practice.
- Such an outcome will deliver a world-leading regulatory regime that is appropriate for the industry and its customers and clients in the UK, the EU and globally. Where global markets exist, the UK should increase its support for, leadership of, and willingness to adopt the standards developed by the international standard setters, particularly in banking where these are more developed. For the international competitiveness of the UK and EU economies, it is imperative that the UK remains the leading global hub for international capital raising, and a gateway to Europe for products and services.
- An orderly exit and certainty are in the economic interests of the UK, the EU and the global community, and apply across all sectors. Clear transitional arrangements will help deliver smooth and efficiently functioning markets, investor protection and continuity of service provision to customers and clients. These are needed at the start of the Article 50 process and should cover two separate periods:
• a bridging period to cover the time between the date the UK exits the EU and the date the new partnership agreement is ratified and becomes unconditional. This should avoid damaging cliff edge effects
• an adaptation period starting on the date the bridging period ends or, if there is no bridging period, on the date of exit. This will give firms, their customers and regulators time to consider the implications of the new partnership and take steps to adapt their businesses to the rules underpinning it.
- In the event of the EU not offering transitional arrangements to enable UK and EU institutions to function cross-border, the UK Government should offer arrangements to keep EU businesses here, similar to those available to non-EU businesses, thus maintaining London as the principal location for Europe’s financial sector.
- The unequalled pool of global talent and expertise assembled in the UK is a major competitive advantage across the UK-based financial and related professional services industry and many others. To retain its status as the leading global financial centre, the UK needs continued access to the best talent: home-grown, from across the EU and from the rest of the world. This is also critical to the UK’s future strength as a successful exporter and provider of low cost capital to Europe.
- As well as policies to improve skills relevant to business success for UK citizens, reassurance about the status of EU citizens and their families currently working in the UK should be given urgently. UK immigration policy should be designed to broaden the future pool of international talent that the industry can access. This is particularly true for specialist roles and for attracting future talent from universities and business schools. It must also facilitate intra-company transfers of staff between different locations around the world.
- It is in the economic interests of the UK and the EU to continue to provide and have access to the widest possible range of financial and related professional products and services without the need to establish a commercial presence in both markets. This will require the UK and the EU to agree:
• a framework for the mutual recognition of regulatory regimes, building on and going beyond the existing equivalence regimes
• continued close cooperation between the FCA/PRA, the European Supervisory Authorities and Member States’ competent authorities, as well as the Bank of England and the ECB. This is in line with arrangements with non-EU regulators, such as the US.
• the ability to market and provide agreed services to existing and new customers as applicable, transact business with them, and manage their money efficiently
• acceptance of professional qualifications, practice rights, standards for regulated products and services and especially prudential regulation set by the relevant regimes
• non-discriminatory access to market infrastructure and free cross-border data flows.
- These proposals should be embedded in a long-term, stable framework which can only be changed by formal agreement. The UK would maintain the same access for EU-based businesses and products as the EU for the UK. This framework should not, however, inhibit the
ability of the UK or the EU to achieve similar arrangements with other countries.
- EU regulation distinguishes between EU established and third country businesses. An issue arises where UK-based businesses without an EU authorised branch or subsidiary deal with EU-based clients. They should be treated as if they were EU established. This could be achieved through substituted compliance where legal compliance with regulations in the UK is seen as a substitute for compliance with the relevant EU regulations and vice versa.
- For all products, a mutual recognition arrangement is needed. This would allow UK investors and consumers to have access to products and services from the EU and vice versa. Divergence between the technical rules governing a product in two countries cannot therefore be a reason to deny market access. Many products have a cross-border structure and UK or EU providers of these products need to continue to have the right to delegate the performance of key services such as portfolio management to third country firms.
- For market infrastructure, which includes trading venues, clearing houses (CCPs), trade repositories, settlement, benchmark administrators, payments systems and securities transfer systems, regulation has been directed at establishing high standards of risk management and
transparency. Multi-currency clearing in London operates under global college arrangements ensuring smooth information flows between regulators and central banks. It has delivered capital efficiencies and cost effectiveness for clients throughout the EU and many other G20
jurisdictions. Clients from these markets, such as banks and asset managers, can put saved capital to use in the wider economy. This should be allowed to continue to ensure global competitiveness through mutual recognition agreements.
- An EU firm or user should be able to satisfy an EU regulatory obligation to execute, clear or report a transaction by using a UK execution entity, CCP or reporting system, and vice versa. Likewise, the ease and transparency for businesses and customers making cross-border payments that are provided through the Single Euro Payments Area (SEPA) should be maintained. This would involve continued close cooperation between the UK authorities and the EU authorities so that regulatory needs are appropriately satisfied and current market structures that customers rely on are not disturbed.
- There is a crucial and broader need to deliver a regime for recognising and enforcing judgments from UK jurisdictions in the EU and vice versa to ensure legal continuity. This is in the interests of parties to contracts in the UK, the EU and globally, and to the ongoing primacy of English law and dispute settlement.
- All the objectives set out in this paper could be delivered in the negotiations under Article 50 to leave the EU and in the negotiations that will agree the future relationship with the EU. These should run in parallel, and not sequentially. This will reduce uncertainty and ensure continuity of service provision to customers and clients. Delivering a bespoke deal based on mutual recognition and regulatory cooperation is likely to take several years, which underlines the concomitant need for clear transitional arrangements. This will deliver an effective and mutually beneficial new paradigm for the UK, the EU and globally.