A nervous disposition
The House of Lords EU Financial Affairs sub-committee has launched an inquiry into the future of financial regulation and supervision following the UK’s departure from the EU. The inquiry asks how important is it to maintain a level playing field for regulation and examines how financial regulation and supervision can evolve in order to ensure financial stability and ensure the UK preserves market access. The committee asks whether there are areas in which it could be beneficial for the UK to deviate from the EU’s current framework in future.
The call for evidence recalls that the UK is currently subject to over 40 pieces of EU primary legislation on financial services, together with innumerable pieces of technical legislation shaped by the European Supervisory Agencies (ESAs).
The committee underlines that after Brexit the UK will “in principle be free to make its own choices on how to regulate and supervise the domestic financial services industry” but points out the interdependence between the UK and EU with the UK’s financial services industry providing a significant proportion of the financing and market infrastructure available to the EU. The need to stay in “lockstep” with the EU and continue to co-operate with the European Supervisory Agencies if the UK wants to seek regulatory equivalence is highlighted. Whether equivalence is the best means to achieve continued co-operation, and what other forms of alignment could exist is a question posed in the inquiry. The committee predicts that in the interests of maintaining access, adequately aligned regulation, and financial stability, there “is likely to be some form of on-going co-operation”. This may in turn restrict the “UK’s room for regulatory manoeuvre or innovation” either during a temporary period of transition, or more permanently. Managing consequent regulatory divergence, and shared supervisory concerns, including mechanisms for dispute resolution, is another matter put out for discussion.
As to how the UK will manage the extraction from the EU, the committee confirms that is important to gain a clear picture of the UK’s current regulatory regime, with a view to “understanding how EU rules will be embedded via the European Union (Withdrawal) Bill, and whether any changes may be made to the status quo in the near term.” It seeks clarification on whether there are any particular legal or practical challenges related to incorporating the existing body of EU financial services legislation into the UK’s domestic law. The Financial Conduct Authority (FCA) has confirmed it is liaising closely with the Treasury and the Bank of England to ensure a “smooth transfer of EU rules and legislation into the domestic framework”, and ensure that the regulatory framework continues to “operate without interruption” following the UK’s withdrawal from the EU.
The committee underlines that questions also remain over how the UK’s supervisors will work with their EU counterparts in the future, and how the newly domesticated regime will be managed, “not least with respect to the potential emergence of cross-border banking crises and the supervision of market infrastructure”. Indeed, FCA CEO Andrew Bailey sets out in the FCA Business Plan for 2017-18 “recent events have demonstrated that risks, events and outages are not confined to the UK. So active involvement with, and the ability to influence discussions in, international forums remain essential.”
The House of Lords inquiry is open until 27 September with a number of evidence sessions held thereafter.
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