Insurance Regulatory eBulletin - Brexit

What does it mean for financial markets to be open?
On 24 April, Andrew Bailey, the FCA Chief Executive, spoke at the City Week forum on International Financial Services on the subject of ‘Brexit: what does it mean for financial markets to be open?’. The key highlights of the speech were:

  • now is the time for the UK and EU authorities to come together and work on the solutions to reduce the risks to financial stability that Brexit could pose;
  • the FCA want to work closely with ESMA and the national EU regulators to continue to enhance the stability and effectiveness of global markets; and
  • Brexit has global implications, not just for the UK and EU, so it is important that we get this right.
He welcomed the agreement on a transition or implementation period for two reasons. First, the need for more time to mitigate the cliff edge risks – the transition reason. Second, it makes far more sense for firms and authorities to put into effect their plans only once they know what the steady agreement looks like – the implementation reason.

He also noted that for the moment we cannot assume that steady state arrangements will be in place and so the UK authorities have also set out plans for unilateral action in the UK to minimise cliff edge risks, providing continuity for firms doing business in the UK and confidence for their customers.

Mr Bailey then went to set out his view that the future steady state needs to be based on mutual recognition rather than EU equivalence, which may not best suit any of the parties. He believes mutual recognition can work if we can start by recognising that our regulatory frameworks are equivalent on day one of Brexit. This will be delivered, no doubt about that. Thereafter, both the UK and the EU will retain autonomy in rule making, but we should put in place cooperation and coordination structures that work to keep them materially consistent and based on international standards. Where rules implement international standards, there should be a strong presumption of equivalence and should not promote regulatory arbitrage.

Speaking at the same Forum, Valdis Dombrovskis, the EC Vice President responsible for financial services noted that “Equivalence is not perfect, neither for firms nor for supervisors. But we should not let perfect be the enemy of good. Equivalence has proven to be a pragmatic solution that works in many different circumstances, and it can work for the UK after Brexit as well.”

He went on to note: “There are some clear limits to equivalence.” Equivalence will remain unilateral and discretionary EU acts will not cover all financial services and would be withdrawn if a non-EU state “should happen to go different ways.”

Clearly there is some negotiation to do in terms of the future steady state of financial services regulation post Brexit.