The Government's recently published response to the House of Lords European Union Committee Report "Brexit: The Future of Financial Regulation and Supervision"1 gives us part of the answer to this question. Much of it confirms what was already known or widely expected. The UK will remain a strong proponent of, and adherent to, global regulatory standards, including those set by the Financial Stability Board and the Basel Committee on Banking Supervision. The UK regulators will continue to adopt a proportionate approach to the application of regulation, with the Government welcoming the PRA's "proportionate application of Basel rules". And the Government and regulators will ensure that regulation supports innovation, including through fintech.
In terms of the future relationship with the EU27, the response is consistent with recent statements by the Government, the Chancellor's speech on 7 March and pronouncements by the PRA and FCA. The Government remains committed to negotiating an ambitious free trade agreement, including mutual market access for financial services, and is confident in its ability to do so given the starting point of "complete regulatory convergence and ... deeply integrated markets". It remains opposed to any moves by the EU27 to fragment markets, in particular the Commission's legislative proposal to revise EMIR to require "systemic" CCPs to establish a presence "onshore" in the EU27. And it wants measures to ensure contract continuity, where needed, for both insurance and derivatives.
So far, so predictable. But there is some news. First, there is confirmation that the Government will not be proposing a competitiveness objective for the PRA and FCA. It takes the view that existing provisions, including that the regulators should "have regard to" competiveness on the terms set out in the Chancellor's letter to them at the time of the Spring 2017 budget, are sufficient. While the Government's response is in line with its (and the industry's) insistence that there should be "no bonfire of the regulations" after the UK leaves the EU, some will see this as a missed opportunity.
Second, the response emphasises the Government's commitment "to the full, timely and consistent implementation of agreed international standards". One relatively early test of this will come in the UK's approach to the implementation of the final elements of the Basel III agreement, often referred to informally as "Basel IV". This package, published last December, envisages implementation starting from January 2022. Our analysis suggests that it is virtually impossible for the EU to meet this timetable, given the EU legislative process. So will the UK do its best to stick to the Basel timetable, even if this means anticipating the outcome of the EU process, or will it wait for the EU (assuming it is on a slower timetable) to ensure maximum alignment between the two approaches and minimum disruption for firms operating in both jurisdictions? And if the UK waits for the EU, what happens if the EU diverges from the Basel III standards to reflect "European specificities" (as it has done before) in a way that is materially non-compliant with the Basel text? We don't have the answers to these tricky questions yet, nor are we likely to have them soon, but the answers will give us some indication of where the UK sees its balance of interests lying, at least in the case of bank capital regulation. The UK's future relationship with the EU and what mutual recognition arrangements are negotiated for financial services market access will have a bearing too.
Third, and perhaps pushing at the boundary of "news", the Government's position on Solvency II remains in lockstep with the PRA's. The overall framework of Solvency II is deemed sensible, albeit there are certain elements of the framework (particularly the Risk Margin) that need reform. It is clear that the options currently being considered by the UK authorities for the reform of the Risk Margin are within the boundaries of Solvency II. This will disappoint those who advocate more radical reform. But the Government's room for manoeuvre is limited. Any departure from EU rules will not be possible under the Brexit transition period arranged until the end of 2020 and, beyond this point, any material divergence may have consequences for future market access arrangements with the EU.
In summary, the Government's response gives us a few more indications of what its post-crisis approach to financial services regulation will look like, but the full picture will take some time to emerge as other pieces of the overall jigsaw puzzle are put in place. What is clear however is that some of the choices will not be straightforward, particularly when it comes to choices between aligning with global or EU regulatory standards, where they differ. This is not only an important political issue, but it will also have serious practical consequences for the financial services industry.
Footnote
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