MNI INTERVIEW: Bespoke EU-UK Financial Sector Deal Unlikely

--Professor Niamh Moloney: Pessimistic Over Bespoke EU-UK Financial Services

System

--Next BOE Governor Bailey Hopes For "Managed Divergence" From EU

By David Robinson

     LONDON (MNI) - The European Union is unlikely to be able to create a

bespoke system to facilitate "managed divergence" for UK financial services

regulation after Brexit, an idea championed by Bank of England

governor-designate Andrew Bailey, a leading European financial law expert told

MNI.

     Law professor Niamh Moloney, who has given evidence to various

parliamentary inquiries and is a Member of the Board of Appeal of the European

Supervisory Authorities, highlighted the difficulty of trying to reverse

engineer the EU's technocratic equivalence process, which was designed to

protect EU financial stability by bringing other regimes more into line with its

regulations.

     Under current rules, EU regulatory equivalence status, which facilitates

cross-border financial services business, can be withdrawn with 30 days' notice

and Bailey and colleagues want a system that will give them room for regulatory

manoeuvre without the risk of sudden termination of equivalence.

     But Moloney pointed out that the EU's equivalence regime is devised to

minimise divergence, and to alert Brussels to any divergence in regulatory

standards.

     "A process of managed divergence has much to offer both sides. However, the

equivalence regime as currently devised is about managing convergence rather

than divergence," she said.

     "Recent reforms, in 2019, suggest that the EU is gearing up for stronger

reporting on divergence in third countries and all of this suggests that

convergence rather than divergence is increasingly the focus of the EU," Moloney

added.

     A chink of light for UK regulators is that the equivalence process does

stress the need for assessments to be proportionate and risk-based, which allows

some divergence, but it is far from clear that this will be adequate for British

purposes.

     --RISK OF UNCERTAINTY

     "If one puts together those notions, proportionality and risk-based

assessment, there could be a way forward there, but it is unlikely that the

equivalence process as currently designed can institutionalise divergence,"

Moloney said.

     Giving evidence this month to the House of Lords EU Financial Affairs

Sub-Committee Bailey and Bank of England Deputy Governor Sam Woods made clear

that they did not believe it was realistic for the UK to mirror EU regulations

after Brexit. They also acknowledged the risk that managed divergence may not be

achievable and that the risk of sudden removal of equivalence would fuel

uncertainty for parts of the UK financial sector.

     Woods said that as far as he understood it the UK government's objective is

"to achieve some kind of greater durability around equivalence. If it can be

withdrawn with 30 days' notice, firms are going to be quite reluctant to put

much weight on it. I hope it will be possible to agree something more durable,

but whether that will be the case in the negotiations is hard to say."

     Brussels and London committed to completing an assessment on whether the UK

will start out as equivalent by the end of June and Moloney said that the

wording around that decision would be important for pointers on where the

process might head.

     The EU Negotiating Mandate published on Tuesday, however, made no reference

to an end June date. It did have a reference to cooperation on financial

services, which highlighted the union's supremacy over the process, stating that

"equivalence mechanisms and decisions remain defined and implemented on a

unilateral basis by the European Union."

     The UK could face a substantial economic hit from a loss of access to the

EU for its financial services sector, with Woods saying that roughly GBP30

billion of financial sector output, equivalent to 1.5% of GDP, directly involves

EU clients and some GBP50 billion of the sector's output is closely linked to

the EU in some way.

--MNI London Bureau; +44 203 865 3829; email: jason.webb@marketnews.com

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